no one elsestatic.ice4.interactiveinvestor.com.au.s3-website... · telstra corporation limited abn...

no one else...

annual report 2006

Visit Telstra Investor Relations at www.telstra.com.au/abouttelstra/investor or visit our interactive advocacy website at www.nowwearetalking.com.au

Telstra annual report 2006

ME152853_Report Cover 1ME152853_Report Cover 1 22/9/06 15:39:0122/9/06 15:39:01

creo

Telstra Corporation LimitedABN 33 051 775 556

Telstra Corporation Limited is an Australian company listed on the Australian Stock Exchange (ASX) and the New Zealand Stock Exchange (NZX) as well as the New York Stock Exchange (NYSE). This Annual Report has been prepared solely to meet the requirements of the Corporations Act, the ASX Listing Rules and other Australian regulations.

In previous years Telstra has prepared its annual report to comply with both the Australian Corporations Act and the US Securities and Exchange Commission (SEC) Form 20-F requirements.

In December 2005 the SEC proposed rules that, if adopted, would make it easier for foreign companies to terminate their SEC registration. If the SEC’s proposed deregistration rules are adopted, Telstra intends to deregister from the SEC ongoing reporting obligations and to delist its ADRs from the NYSE at the earliest opportunity, which may be accomplished by the end of this calendar year. If Telstra is unable to deregister before the end of calendar 2006, then it will lodge a Form 20-F with the SEC in December 2006. If Telstra lodges a Form 20-F with the SEC, then it will also lodge the Form 20-F with the ASX.

Except where otherwise stated, the information contained in this Annual Report was previously released to the market on 10 August 2006 and was current as of that date.

Shareholders should also refer to Telstra’s Annual Review for additional information about the company. Copies of the Annual Report and the Annual Review are available on the Internet:

www.telstra.com.au/abouttelstra/investor/annual_reports.cfm

Copies of the Annual Report and the Annual Review may also be requested from the Share Registry by calling 1300 88 66 77.

FRONT COVERFeatures Nick Dionisopoulos from Telstra Operations. Nick is part of the fi rst wave of students to experience the benefi ts of the newly launched Telstra Learning Academy. The Learning Academy is equipping our technical and engineering people with the right skills to build, operate and maintain next-generation networks and better serve customers.

can do what Telstra does.Telstra is the only communications company in Australia that can provide customers with a truly integrated telecommunications experience across fi xed line, mobiles, broadband (BigPond®), information, transaction and search (Sensis®) and pay TV (FOXTEL).

Our vision is to do for customers what no one else has done: create a world of 1-click, 1-touch, 1-button, 1-screen, 1-step solutions that are simple, easy and valued by individuals, businesses, enterprises and government.

Note – Timing of events may be subject to change. Any changes will be notifi ed to the AustralianStock Exchange (ASX).

2007

Half year results announcement 15 FebEx-dividend share trading commences 26 FebRecord date for interim dividend 2 MarInterim dividend paid 30 MarAnnual results announcement 9 AugEx-dividend share trading commences 20 AugRecord date for fi nal dividend 24 AugFinal dividend paid 21 SepAnnual General Meeting 7 Nov

Financial calendarRegistered Offi ceLevel 41, 242 Exhibition StreetMelbourne Victoria 3000 Australia

Douglas GrationCompany Secretaryemail: [email protected]

General Enquiries – Registered Offi ceAustralia: 1300 368 387All Other: +61(8) 8308 1721

Shareholder EnquiriesAustralia: 1300 88 66 77All Other: +61(2) 8280 7756Fax: +61(2) 9287 0303email: [email protected] website: www.linkmarketservices.com.au

Telstra Corporation LimitedIncorporated in the Australian Capital Territory

Telstra is listed on Stock Exchanges in Australia,New Zealand (Wellington), and the USA (New York)

Investor RelationsLevel 36, 242 Exhibition StreetMelbourne Victoria 3000 Australia

David AndersonGeneral ManagerPh: +61(3) 9634 8014email: [email protected]

The Telstra Share RegistrarLink Market Services Limited PO Box A942Sydney South NSW 1234 Australia

WebsitesTelstra’s investor relations home page:www.telstra.com.au/abouttelstra/investor

Telstra’s interactive advocacy website:www.nowwearetalking.com.au

Depositary for American Depository ReceiptsThe Bank of New YorkInvestor ServicesPO Box 11258Church Street StationNew York, NY 10286-1258

Toll Free telephone number for US callers:1-888-BNY-ADRs

Telephone number for international callers:+1 (212) 815 3700

email: [email protected]: www.stockbny.com

Contact details


1

Telstra Corporation Limited and controlled entities

Contents

Contents

1. Full year results and operations review - June 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

2. Corporate Governance and Board Practices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49

3. Corporate Social Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

4. Shareholder Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65

5. Directors’ report including Remuneration report. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69

6. Financial report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

7. Freedom of Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323

2


Contents

™: trade mark of Telstra Corporation Limited ABN 33 051 775 556

®: registered trade mark of Telstra Corporation Limited ABN 33 051 775 556

*: CHESS is a registered trade mark of McDonnell Information Systems Group Plc

^: Trading Post is a registered trade mark of Research Resources Pty Ltd.

†: Hutchinson 3G is a registered trademark of Hutchison Whampoa Enterprises Limited.†: CitySearch is a registered trade mark of CitySearch Australia Pty Ltd.

‡: FOXTEL is a registered trademark of Twentieth Century Fox Film Corporation.

‡: FOXTEL Digital is a trade mark of Twentieth Century Fox Film Corporation.

‡: FOXTEL Box Office is a registered trade mark of Twentieth Century Fox Film Corporation.

‡: FOXTEL iQ is a trade mark of Twentieth Century Fox Film Corporation.

˜: Iridium is a registered trade mark of Iridium Satellite LLC.

All amounts are expressed in Australian dollars (A$) unless otherwise stated.

3


Full year results and operations review - June 2006

Table of Contents for the year ended 30 June 2006

Page Number

Summary Financial InformationResults of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4Cash Flow Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5Balance Sheet Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Segment Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7Statistical Data Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Analysis informationOperating Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9PSTN Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Mobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15Internet and IP Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18ISDN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Specialised Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Advertising and Directories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22Intercarrier Services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Inbound Calling Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Solutions Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Offshore Controlled Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Payphones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Pay TV Bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Customer Premises Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Other Sales and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Other Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Labour Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Goods and Services Purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33Other Expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35Share of net gain/loss of jointly controlled entities and associated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Depreciation and Amortisation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37Net Finance Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38Major Subsidiaries - Financial Summaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39Sensis Financial Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39CSL New World Mobility Group Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40TelstraClear Financial Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41REACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42Cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44Balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47

4



Summary financial informationResults of Operations

(i) Basic and diluted earnings per share are impacted by the effect of shares held in trust for employee share plans and instruments held under executive remuneration plans.

Year Ended 30 June2006 2005 Change 2006/2005

$m $m $m (% change)

Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,750 22,161 589 2.7%Other revenue (excl. finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 20 2 10.0%Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,772 22,181 591 2.7%Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 261 67 25.7%Total income (excl. finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,100 22,442 658 2.9%

Operating expenses (excl. interest expense and depreciation and amortisation) . . . . . . 13,521 11,884 1,637 13.8%Share of net (gain)/loss from jointly controlled and associated entities . . . . . . . . . . . . (5) 94 (99) (105.3%)Earnings before interest, income tax expense, depreciation and amortisation (EBITDA) . 9,584 10,464 (880) (8.4%)Depreciation & amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,087 3,529 558 15.8%Earnings before interest & income tax expense (EBIT) . . . . . . . . . . . . . . . . . . . . . . . 5,497 6,935 (1,438) (20.7%)Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 880 56 6.4%Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,561 6,055 (1,494) (24.7%)Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380 1,746 (366) (21.0%)Net profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 4,309 (1,128) (26.2%)

Effective tax rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.3% 28.8% 1.5%EBITDA margin on sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42.1% 47.2% (5.1%)EBIT margin on sales revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2% 31.3% (7.1%)

cents centsChange

cents % changeBasic earnings per share (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.7 34.7 (9.0) (25.9%)Diluted earnings per share (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.7 34.6 (8.9) (25.7%)

Dividends paid or declared:Interim dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 14.0Special dividend paid with interim dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 6.0Final dividend declared (2005 paid) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 14.0Special dividend to be paid with final dividend (2005 paid) . . . . . . . . . . . . . . . . . . . - 6.0

5



Cash Flow Summary

(i) Please note: Due to the implementation of A-IFRS, we have revised the presentation of the cash flow summary and our statutory reported statement of cash flows. This has resulted in some reclassifications between our key cash flow totals (net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities). Consequently, the 2005 comparative totals disclosed for these lines have changed from the amounts disclosed as at 30 June 2005. The most significant change is the reclassification of our finance costs paid from operating into financing, and the reclassification of interest received from operating into investing.


$m $m $m (% change)

Receipts from customers (inclusive of GST) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,229 24,526 703 2.9%Payments to suppliers/employees (inclusive of GST) . . . . . . . . . . . . . . . . . . . . . . . (14,785) (13,848) (937) 6.8%Net cash generated by operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,444 10,678 (234) (2.2%)Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,882) (1,718) (164) 9.5%Net cash generated by operations (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,562 8,960 (398) (4.4%)

Payments for property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,636) (2,995) (641) 21.4%Payments for intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (619) (544) (75) 13.8%Capital expenditure before investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,255) (3,539) (716) 20.2%Investment expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (48) (590) 542 (91.9%)Capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,303) (4,129) (174) 4.2%Repayment of loans to jointly controlled entities and associated entities . . . . . . . . . . - (37) 37 -Receipts from asset sales/other proceeds/dividends . . . . . . . . . . . . . . . . . . . . . . . . 225 322 (97) (30.1%)Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 78 (12) (15.4%)Net cash used in investing activities (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,012) (3,766) (246) 6.5%Operating cash flows less investing cash flows (i) . . . . . . . . . . . . . . . . . . . . . . . . . 4,550 5,194 (644) (12.4%)

Movements in borrowings/finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 1,393 (900) (64.6%)Employee share loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 19 5 26.3%Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,970) (4,124) (846) 20.5%Share buy-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (756) 756 -Finance costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (940) (879) (61) 6.9%Purchase of shares for employee share plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) - (6) -Net cash used in financing activities (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,399) (4,347) (1,052) 24.2%

Net cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (849) 847 (1,696) (200.2%)

6



Balance Sheet Summary

((i) The Net Debt and Gross Debt balances as at 30 June 2005 do not reflect the impact of the relevant A-IFRS standard for financial instruments as this standard was only adopted as at 1 July 2005. Had it been adopted for 30 June 2005, Gross Debt would have been $13,208 million and Net Debt would have been $11,660 million.


$m $m $m (% change)

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,879 5,582 (703) (12.6%)Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,123 6,329 (206) (3.3%)Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,622 22,891 731 3.2%Total non-current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,296 29,629 1,667 5.6%Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,343) (21,553) (1,790) 8.3%Net assets/shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832 13,658 (826) (6.0%)Gross debt (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,746) (13,319) (427) 3.2%Net debt (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (13,057) (11,772) (1,285) 10.9%

RatiosEBITDA Interest Cover (times) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 11.9 (1.7) (14.3%)Net Debt to EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4 1.1 0.3 27.3%Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.8% 20.6% (4.8%)Return on average equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24.2% 30.6% (6.4%)Return on average investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.4% 27.2% (5.8%)Net debt to capitalisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50.4% 45.9% 4.5%

7



Segment Information

n/m - not meaningful(i) Revenue for the other segment relates primarily to our revenue earned by Telstra Media for our share of FOXTEL cable subscriber revenue

and for services provided to FOXTEL. The Asset Accounting Group is the main contributor to the segment EBIT for this segment, which is primarily depreciation and amortisation charges.

(ii) The allocations noted above reflect management’s accountability framework and internal reporting system and accordingly no reasonable basis for reallocation to the respective business segments exists. As a consequence, there are several things that should be noted about the information above:• Because no reasonable basis for allocation exists, sales revenue associated with mobile handsets for the Consumer, Business and

Enterprise and Government segments are allocated totally to the Consumer segment, with the exception of some products sold in relation to small to medium enterprises which are allocated to the Business segment. Ongoing prepaid and postpaid mobile revenues derived from our mobile usage is recorded in all three of these segments depending on the type of customer serviced. In addition, the majority of goods and services purchased associated with our mobile revenues are allocated to the Consumer segment.

• Revenue received in advance in relation to installation and connection fees is allocated totally to the Consumer segment.• Revenue derived from our BigPond Internet products are recorded in the customer facing business segments of Consumer, Business and

Enterprise and Government. Certain distribution costs in relation to these products are recognised in these three business segments. Telstra Operations recognises certain expenses in relation to the installation and running of the broadband cable network. In accordance with our application of the business segment definition in relation to customer type, we have not reallocated these items to the Telstra BigPond business segment.

Segment informationSegment revenue Segment EBIT

Year Ended 30 June Year Ended 30 June2006 2005 2006/2005 2006 2005 2006/2005

$m $m (% change) $m $m (% change)

Telstra Consumer, Marketing and Channels . . . . . 8,897 8,931 (0.4%) 5,721 6,248 (8.4%)Telstra Business . . . . . . . . . . . . . . . . . . . . . . 3,053 3,099 (1.5%) 2,412 2,488 (3.1%)Telstra Enterprise and Government . . . . . . . . . . 4,664 4,622 0.9% 2,706 2,812 (3.8%)Telstra Wholesale . . . . . . . . . . . . . . . . . . . . . 2,899 2,551 13.6% 2,693 2,283 18.0%Sensis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,836 1,719 6.8% 864 812 6.4%Telstra International . . . . . . . . . . . . . . . . . . . 1,481 1,398 5.9% 156 11 n/mTelstra Operations . . . . . . . . . . . . . . . . . . . . . 309 238 29.8% (4,175) (3,371) 23.9%Other (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 87 29.9% (4,909) (4,351) 12.8%Eliminations . . . . . . . . . . . . . . . . . . . . . . . . (480) (464) 3.4% 29 3 n/mTotal Telstra (ii). . . . . . . . . . . . . . . . . . . . . . . 22,772 22,181 2.7% 5,497 6,935 (20.7%)

8



Statistical Data Summary

(i) Includes national long distance minutes from our public switched telephone network (PSTN) and independently operated payphones. Excludes minutes related to calls from non-PSTN networks, such as ISDN and virtual private networks.

(ii) Includes all calls made from mobile telephones including long distance and international calls, excludes data, messagebank, international roaming and CSL New World.

(iii) Excludes Incontact services (a free service with restrictive calling access) and advanced access services, such as ISDN services.(iv) Expressed in equivalent number of clear voice channels. Comparatives have been restated to reflect updated assessment of channels per SIO on ISDN 10/20/

30.The previous assessment was based on a calculation of channel configurations across sample services. The revised assessment is based on the entire customer base.

(v) Excludes CSL New World SIOs.(vi) Within Broadband, retail products include cable, satellite, BigPond Wireless, HyperConnect, ADSL and Symmetrical HDSL, while wholesale products include

DSL Layer 1, DSL Layer 2, DSL layer 3, Spectrum Sharing and vISP Broadband. Total Broadband subscribers exclude Broadband component of ULL and Mobile Broadband which form part of intercarrier services and mobiles revenue respectively.

(vii Excludes offshore, casual and part time employees. June 2005 has been restated, refer to Labour section for further information.(viii) Includes all domestic and offshore employees, including controlled entities. June 2005 has been restated, refer to Labour section for further information.(ix) Includes all domestic and offshore employees, including controlled entities, as well as contractors and agency staff. June 2005 has been restated, refer to

Labour section for further information.

Year Ended 30 June2006 2005 Change % change

Billable traffic data (in millions)Local calls (number of calls) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,432 8,469 (1,037) (12.2%)National long distance minutes (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,215 7,743 (528) (6.8%)Fixed to mobile minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,491 4,375 116 2.7%International direct minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 580 (46) (7.9%)Mobile voice telephone minutes (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,311 6,746 565 8.4%Inbound Calling Products - B Party Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,922 2,773 149 5.4%Inbound Calling Products - A Party Calls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 940 72 7.7%Number of short messaging service (SMS) sent . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,019 2,289 730 31.9%

Network and operations data (in millions)Basic access lines in service (iii)Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.46 5.60 (0.14) (2.5%)Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.32 2.45 (0.13) (5.3%)Total retail customers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.78 8.05 (0.27) (3.4%)Domestic wholesale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16 2.07 0.09 4.3%Total basic access lines in services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.94 10.12 (0.18) (1.8%)

ISDN access (basic lines equivalents) (in thousands) (iv) . . . . . . . . . . . . . . . . . . . . . 1,214 1,208 6 0.5%

Mobile services in operation (SIO) (in thousands) (v)3G . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 - 317 -GSM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,468 6,894 (426) (6.2%)CDMA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,703 1,333 370 27.8%Mobile services in operation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,488 8,227 261 3.2%

Total Wholesale mobile SIOs (in thousands). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 83 36 43.4%

Online subscribers (in thousands)Narrowband subscribers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 1,205 (178) (14.8%)Broadband subscribers - Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476 856 620 72.4%Broadband subscribers - Wholesale (vi). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,427 888 539 60.7%Total Broadband subscribers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,903 1,744 1,159 66.5%Total online subscribers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,930 2,949 981 33.3%

Total FOXTEL subscribers (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,130 1,023 107 10.5%

Employee dataDomestic full time staff (vii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,599 39,680 (2,081) (5.2%)Full time staff and equivalents (viii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,452 46,227 (1,775) (3.8%)Total workforce (ix) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49,443 52,705 (3,262) (6.2%)

9



Full year results and operations review - June 2006Operating Revenues

Operating RevenuesYear Ended 30 June

2006 2005 Change 2006/2005$m $m $m (% change)

PSTN ProductsBasic access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,318 3,362 (44) (1.3%)Local calls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023 1,284 (261) (20.3%)PSTN value added services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 250 (4) (1.6%)National long distance calls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913 1,013 (100) (9.9%)Fixed to mobile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,491 1,566 (75) (4.8%)International direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 234 (33) (14.1%)Fixed interconnection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 309 (23) (7.4%)Total PSTN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,478 8,018 (540) (6.7%)MobilesMobile services - Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,846 3,736 110 2.9%Mobile services - Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 24 12 50.0%Mobile services - Interconnection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 623 547 76 13.9%Mobile handsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 381 86 22.6%Total Mobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,972 4,688 284 6.1%Internet and IP solutionsNarrowband . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 275 (55) (20.0%)Retail broadband . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730 463 267 57.7%Wholesale broadband . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 261 200 76.6%Internet direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 123 20 16.3%IP solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 207 78 37.7%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 48 20 41.7%Total Internet and IP solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,907 1,377 530 38.5%ISDN products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807 890 (83) (9.3%)Specialised data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884 966 (82) (8.5%)Advertising and Directories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 1,585 126 7.9%Intercarrier services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 290 61 21.0%Inbound calling products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 449 - 0.0%Solutions management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 989 931 58 6.2%HKCSL New World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 734 96 13.1%TelstraClear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620 625 (5) (0.8%)Offshore services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 252 43 17.1%Payphones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 121 (17) (14.0%)Pay TV bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 263 57 21.7%Customer premises equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 231 43 18.6%Other sales & service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759 741 18 2.4%Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,750 22,161 589 2.7%Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 20 2 10.0%Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,772 22,181 591 2.7%Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 261 67 25.7%Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,100 22,442 658 2.9%

10



In the following discussion, we analyse revenue for each of our major products and services. The principal areas of operating revenue growth for fiscal 2006 were:

• mobiles;

• internet and IP solutions;

• advertising and directories; and

• Pay TV bundling.

In fiscal 2006, our sales revenue growth was partially offset by a 6.7% decline in PSTN product revenues as customers continue to move towards new products and services to satisfy their requirements and competition intensifies in the market.

Competition has continued to intensify and as a result, we have seen our revenues decline in some areas despite increasing volumes. We have also seen a continued shift in revenue from our traditional higher margin retail operations (such as our PSTN products) to our lower margin retail products (such as mobiles and broadband). We have continued to concentrate on product bundling initiatives and managing the migration of customers to other products. In the second half of fiscal 2006, we introduced our first subscription price based offers into the Consumer market to help address the decline of our traditional product revenues and to make pricing simple for our customers. We have also introduced market based management to enable us to better serve our customers’ needs as we understand them better.

We expect that there will be continued competitive pressure in some of our traditional product areas. However, the volume of telecommunications services purchased in Australia has increased and the range of products and services offered continues to expand. Based on the overall growth anticipated in the volume of telecommunication services, we expect our operating revenue to continue to grow.

11



PSTN Products

(i) Includes national long distance minutes from our public switched telephone network (PSTN) and independently operated payphones. Excludes minutes related to calls from non-PSTN networks, such as ISDN and virtual private networks.

Total PSTN products revenue is $7,478 million, which declined by 6.7% or $540 million during fiscal 2006. This compares with a decline of 3.6% in fiscal 2005 (inclusive of fixed interconnection).

There has been a general reduction in PSTN volumes, with a decline in retail basic access lines, and volume reductions across local calls, national long distance calls, international direct calls and fixed interconnection. Yields have also declined in local calls, national long distance, fixed to mobile, international direct and fixed interconnection due to competitive pricing pressure.

During the second half of the year, we introduced subscription pricing plans for our PSTN customers, which offer greater choice and value from the home phone, including untimed national long distance calls and low or no charge local calls. These plans are yet to show any significant impact on our PSTN revenues.

Basic access

Our basic access revenue includes monthly rental fees, installation charges and connection charges, from telephone service connections between a customer’s premises and our PSTN network.

Basic access revenues are affected by:

• housing growth;

PSTN ProductsYear Ended 30 June


Basic access revenueRetail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,592 2,725 (133) (4.9%)Domestic wholesale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726 637 89 14.0%Total basic access revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,318 3,362 (44) (1.3%)

Local call revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023 1,284 (261) (20.3%)PSTN value added services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 250 (4) (1.6%)National long distance call revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913 1,013 (100) (9.9%)Fixed to mobile revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,491 1,566 (75) (4.8%)International direct revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 234 (33) (14.1%)Fixed interconnection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 309 (23) (7.4%)Total PSTN revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,478 8,018 (540) (6.7%)

Basic access lines in service (in millions)Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.46 5.60 (0.14) (2.5%)Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.32 2.45 (0.13) (5.3%)Total Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.78 8.05 (0.27) (3.4%)Domestic wholesale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.16 2.07 0.09 4.3%Total access lines in service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.94 10.12 (0.18) (1.8%)

Number of local calls (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,432 8,469 (1,037) (12.2%)National long distance minutes (in millions) (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,215 7,743 (528) (6.8%)Fixed to mobile minutes (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,491 4,375 116 2.7%International direct minutes (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 580 (46) (7.9%)

Note: statistical data represents management's best estimates.

12



• competition;

• demand for telephone services and additional lines;

• regulatory constraints in relation to wholesale basic access;

• migration to other products such as broadband and mobiles; and

• price changes.

Under our basic access pricing structure, we have a range of access and call pricing packages to give our residential and business customers choice in the plan they select, along with a range of reward options. These pricing packages are reviewed regularly to reflect the changing needs of customers. For the most part, wholesale customers receive the pricing plan which only incorporates the basic telephone service with local call rates, excluding long distance and fixed to mobile calls (with a “residential” and “business” differentiation still applying).

Our operating revenue from basic access services was also affected by competition during fiscal 2006. During fiscal 2006, the number of retail residential and business basic access lines decreased due to strong competition and migration to alternative products such as broadband and mobiles. Domestic wholesale basic access lines in service grew, reflecting the increased penetration of our competitors into the retail basic access market. In the retail segment, we saw a decline of 270,000 lines in service or 3.4%, mainly driven by the migration to other technologies which is underpinning the retail trend across PSTN revenues. This decline was partially offset by an increase of 90,000 lines in service or 4.3% in the wholesale market.

Overall our operating revenue from basic access services decreased. During fiscal 2006, we introduced various basic access packages, which reduced the decline in yield in this area, despite an overall decrease in basic access lines in service.

Rental revenue increased due to a rise in line rental price charges from December 2005, which included a rise in basic access prices for wholesale and non preselected retail residential customers. In addition, penetration of higher value HomeLine plans including HomeLine Ultimate, a new subscription based plan introduced in April 2006, is also expected to contribute positively. Partly offsetting this was an increase in the discounts to Whole of Business customers and pensioners.

Local calls

Our local call revenue from local call charges, consists of revenue from local calls on our PSTN network and includes revenue from our megapop product which allows ISPs to offer untimed local call PSTN dial up access for their customers via a single national dial up 019 number. For the most part we charge for local calls without a time limit.

Our local call revenue is affected by:

• the number of basic access lines in service and customers moving from our basic access service to our other access services, such as mobiles and broadband;

• competition;

• increasing use of email;

• customers migrating to mobile and fixed to mobile calling; and

• pricing changes.

Local call revenue decreased by $261 million or 20.3% in fiscal 2006, with both our retail and wholesale revenues being negatively impacted by ongoing product substitution from fixed calling to mobile voice calls and SMS, which is accelerated by the take up of capped mobile plans currently being heavily promoted by

13



competitors. Substitution of data local calls continues to occur due to the migration of dial up internet customers to broadband. The price in the wholesale market also declined as a result of a rise in volume discounts.

Generally, call volumes have continued to fall during fiscal 2006, reflecting the impact of customers migrating to other products, such as mobiles, fixed to mobile, and broadband products. This is highlighted by the fact that the number of local calls reduced by 12.2% during the year.

Work continues on the integration of mobile, fixed and broadband services to add value to the fixed line.This is aimed at arresting the decline in fixed line use.

PSTN value added services

Our revenue from PSTN value added services declined by $4 million or 1.6% during fiscal 2006. This decrease was driven by a reduction in a number of mature products, such as Indial, Siteline, Enhanced faxstream and other access products nearing the end of their lifecycle. Customers are also migrating to product offerings such as internet products and premium voice communication applications.

Messaging and call completion products increased marginally during fiscal 2006. Calling number display continued to grow due to attractive packaging discounts resulting in subscriber numbers increasing by 10%. This has been partially offset by call return revenue which declined by 14% due to lower overall call volumes and substitution to other products.

National long distance calls

Our operating revenue from national long distance consists of revenue from national long distance calls made from our PSTN network to the fixed network.

We generally charge for national long distance calls based on the time of day, day of week, destination and duration of the call, but packages are also offered on a capped price basis and under subscription pricing arrangements. A variety of promotions and pricing options are offered to encourage our customers to use our service and to inform them about the price and value of our service. The majority of our operating revenue from national long distance calls comes from our residential and small business customers.

General economic conditions and customer perceptions about the cost and value of our service relative to competitor alternatives, largely drive our national long distance call revenue. Competitive activity continues to negatively affect this revenue category directly through override and preselection, and indirectly through competition for access lines. In addition, national long distance calls are impacted by customers migrating to mobile, broadband and fixed to mobile calling.

Our operating revenue from national long distance calls declined by $100 million or 9.9% in fiscal 2006 compared with fiscal 2005. Competitor activity in the fixed line market continues to be high and most carriers have a fixed or mobile cap, or a combination of both in the market. This is having a direct impact on our national long distance revenues particularly where competitors are bundling these calls with broadband offerings. Volumes are down as a result of lower basic access services in operation and the impact of fixed to mobile substitution and other calling options available to customers. We have increased discounts compared to fiscal 2005 in order to retain and win back customers.

We continue to respond to competition with competitively priced packages. However, with the strong growth in mobile and internet services in the Australian market, we expect national long distance call revenue to continue to be negatively impacted by ongoing migration of customers to mobile and internet products, and by the continued growth of subscription pricing plans. Work continues on the integration of mobile, fixed and broadband services to add value to the fixed line. This is aimed at arresting the decline in fixed line use.

14



Fixed to mobile calls

Our fixed to mobile revenue is generated by calls originating on our fixed networks and terminating on any mobile network. We generally charge for fixed to mobile calls based on time of day and mobile carrier, however packages are also offered on a capped price basis. Our operating revenue for fixed to mobile calls is approximately split evenly between business and residential customers. The growth of the Australian mobile telecommunications market has driven revenue expansion in this product category in recent times. However, the introduction of capped plans in the mobile market has now impacted the volume of fixed to mobile activity as customers continue to slowly move their usage from our PSTN products. The fixed to mobile environment is influenced by fixed to mobile preselection, whereby the carriage service provider (CSP) selected by a customer for national long distance calls automatically becomes the customer’s provider for fixed to mobile calls.

During fiscal 2006, fixed to mobile revenue declined by $75 million or 4.8%. We experienced a decline of $114 million due to lower yields resulting from higher discounts arising from ongoing competitive pressure, including incorporating fixed to mobile calls in reward offerings and the changing mix in (Services In Operation) SIOs from PSTN to ISDN and CustomNet. This increase in the level of discounting is representative of our increased campaign activity aimed at reducing customer churn to other providers and win customers in the market place.

This decline in revenue was partially offset by growth in call volumes mainly due to the continued expansion of mobile services in the Australian market. The positive volume growth for fiscal 2006 contributed $38 million due to higher calls and minutes of use. This growth is consistent with the growth in the total market mobile SIOs, i.e. a higher number of mobiles on which fixed calls can terminate, and the higher number of calls.

International direct calls

Our operating revenue from international direct relates to revenue we generate from international calls made from Australia to a destination outside Australia (outbound). This revenue is largely driven by general economic conditions, customer perceptions about the cost and value of our service, competition, migration to broadband alternatives and promotion and advertising.

Our international direct revenue declined by 14.1% to $201 million in fiscal 2006 primarily as a result of lower volumes and continued competitive pressure on price. Factors which have influenced this trend include the competitive pressures from calling cards, fixed to mobile substitution and the growth of Voice over IP in the market place. Despite major international events and the occurrence of unfortunate circumstances which have provided short term stimulus to call traffic, international direct minutes declined 7.9% for the year.

Fixed Interconnection

Fixed interconnection is made up of local and non local PSTN/ISDN access interconnection services provided to other carriers. This category is a highly regulated area of the Australian telecommunication market.

Our operating revenue from fixed interconnection decreased by 7.4% to $286 million during fiscal 2006 driven by reduction in both volume and price. Volume declines are in line with cross company trends in PSTN traffic and have been particularly impacted by migration to mobiles and, to a smaller degree, ULL (unconditioned local loop) build. The decline due to price arose from lower charges consistent with our undertakings lodged with the ACCC for PSTN.

15



MobilesOur operating revenue from mobiles consists of revenue from access fees and call charges, as well as value added services comprising international roaming, mobile MessageBank® and mobile data. It also includes revenue from the sale of mobile handsets and interconnection charges where calls from other carriers’ customers terminate on our network.

During fiscal 2006, we commenced the construction of a new 3GSM 850 network that will operate in the850 megahertz spectrum. Until recently, we operated only two primary mobile networks, GSM and CDMA. Over time we will migrate our customers from our old networks onto our new 3G network. The new network is intended to reduce our level of network costs and complexity and enable us to provide our customers with faster speeds, better coverage and enable them to access a far greater range of services and content than our older network. We continue to offer 3G services to our customers over our existing 3G 2100 network through our joint venture with Hutchison Telecommunication (Australia) Limited (Hutchison).

The mobile telecommunications market has continued to grow during fiscal 2006, although at a lower rate of growth than in the prior year. The growth was driven by the increase in capped price plans, heightened campaign activity particularly around 3G services, and the increasing use of mobile data services such as Blackberry and 1xRTT. While voice continues to be the largest contributor to mobiles revenue, value added services (inclusive of mobile data) is the fastest growing, now representing 25.4% of mobile services revenue in fiscal 2006. With competition intensifying, we have introduced a comprehensive and broad reaching program of segment based customer management to enable us to provide the best service and solutions to all of our customers.

MobilesYear Ended 30 June


Access fees and call charges. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,703 2,765 (62) (2.2%)Value added services:- International roaming . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266 243 23 9.5%- Mobile messagebank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 187 12 6.4%- Short message service (SMS) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 494 457 37 8.1%- Other mobile data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 84 100 119.0%Total value added services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,143 971 172 17.7%Total Mobile services revenue - retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,846 3,736 110 2.9%Mobile services revenue - wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 24 12 50.0%Mobile services revenue - mobiles interconnection . . . . . . . . . . . . . . . . . . . . . . . . 623 547 76 13.9%Total mobile services revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,505 4,307 198 4.6%Mobile handset sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 381 86 22.6%Total mobile goods and services revenue (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,972 4,688 284 6.1%

3G mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 - 317 -GSM mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,468 6,894 (426) (6.2%)CDMA mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,703 1,333 370 27.8%Total mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,488 8,227 261 3.2%

Mobile Wireless - EVDO SIO (thousands) (included in CDMA SIO above) . . . . . . . . . . . . 60 19 41 215.8%

Prepaid mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,597 3,570 27 0.8%Postpaid mobile SIO (thousands). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,891 4,657 234 5.0%Total mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,488 8,227 261 3.2%

16



(i) Excludes revenue from: - calls from our fixed network which we categorise as fixed to mobile; and - CSL New World which is recognised separately as controlled entity revenue.

(ii) Includes all calls made from mobile telephones including long distance and international calls, excludes data, messagebank, international roaming and CSL New World.

(iii) Average retail revenue per user per month is calculated using average retail SIO and includes mobile data, messagebank and roaming revenues.It excludes interconnection and wholesale revenue.

(iv) Includes mobile wireless EVDO revenue, excludes BigPond wireless.

During fiscal 2006, mobile service revenue increased mainly due to the continued growth in the number of mobile telephone subscribers and expanding minutes of use, offset by continued pressure on prices. In addition, we experienced strong growth in our value added services revenue for example messagebank, SMS, Blackberry and 1xRTT.

Access fees and call charges declined by 2.2% to $2,703 million in fiscal 2006 reflecting a decrease in GSM revenues partially offset by an increase in CDMA revenues. Both technology categories have been impacted during the year by the competitive environment and the growth in capped price plans which has directly impacted yields. CDMA prepaid was also impacted by lower revenues attributable to a promotion which gave CDMA subscribers half price calls for a year. During the year we moved from 1% of our mobile customers on capped plans to 4.3% on capped plans.

SIOs increased overall, but it was CDMA that drove the growth with a 27.8% increase whilst GSM (including 3G) reduced marginally by 1.6%. The CDMA revenues benefited from an increased emphasis on activations and the availability of more competitively priced handsets. Call minutes generally increased for each technology, but these benefits did not outweigh the impact on price for the period. Average revenue per user (ARPU) dropped by 98 cents over the year led by a reduction in prepaid ARPU by 11.4% or $1.39, with postpaid ARPUs stable.

CDMA wholesale mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 62 11 17.7%GSM wholesale mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 21 25 119.0%Total wholesale mobile SIO (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 83 36 43.4%

Number of SMS sent (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,019 2,289 730 31.9%

Deactivation rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23.4% 19.2% 4.2% 4.2%

Mobile voice telephone minutes (in millions) (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . 7,311 6,746 564 8.4%

Average revenue per user per month $'s (iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.35 39.33 (0.98) (2.5%)Average prepaid revenue per user per month $'s (iii) . . . . . . . . . . . . . . . . . . . . . . . . 10.85 12.24 (1.39) (11.4%)Average postpaid revenue per user per month $'s (iii) . . . . . . . . . . . . . . . . . . . . . . . 58.99 59.06 (0.07) (0.1%)

Average mobile data revenue per user per month (iv) . . . . . . . . . . . . . . . . . . . . . . . 6.77 5.70 1.07 18.8%


MobilesYear Ended 30 June


17



Revenue from international roaming grew by 9.5% to $266 million in fiscal 2006. The rise was primarily due to an increase in outbound roaming minutes and a marginal increase in revenue per call. In addition, inbound roaming revenue remained steady as price increases were equally offset by decreased usage.

Revenue from MessageBank® increased by 6.4% to $199 million in fiscal 2006 primarily due to growth in minutes resulting from higher mobile usage and SIOs.

SMS and Multimedia Messaging Services (MMS) revenues increased by 8.1% to $494 million after a significant increase in the number of messages sent. There is a component of migration from voice communication to message communication which is evident in the reported growth rates. This has been stimulated by a 1 cent text offer and other rewards and bonus options offered during the year. In addition, mobile data growth was also experienced in the corporate segment through the Blackberry and Telstra Mobile Broadband™ products on the CDMA network. This is reflected in the average mobile data revenue per user per month increasing over fiscal 2006.

Revenue from handset sales increased by 22.6% to $467 million in fiscal 2006 primarily due to growth in the number of GSM mobile handsets sold. This growth is attributed to an increase in marketing campaign activity focusing on the sale of 3G handsets, particularly in the second half of the year.

Mobiles interconnection revenue has grown 13.9% to $623 million. The main product driving this is GSM wholesale domestic roaming which grew in fiscal 2006 by $43 million after Hutchison 3G roaming commencing in April 2005. This corresponds directly to an $8 million drop in CDMA roaming after Hutchison introduced their 3G product as an alternative to CDMA. SMS interconnect has grown A$17 million due to an increase in traffic resulting from growth in mobile SIOs as well as a continued increase in the popularity of text messaging as a cheaper alternative to mobile voice calling. In addition, mobiles terminating revenue grew by $24 million due to a 12% increase in termination volumes, partially offset by price reductions resulting from regulatory pricing pressures on mobile terminating rates. The increase in termination volumes has resulted from growth in retail SIOs, particularly in CDMA and pre-paid services.

Wholesale mobile service revenue increased in fiscal 2006 by 50.0% or $12 million due to growth in the Wholesale GSM resale product introduced in fiscal 2005. It enabled resellers to develop and market their own branded mobile solutions including voice, text, multimedia messaging and Messagebank on the GSM network which they could only previously do on the CDMA network. Minutes of use have grown significantly since this product was introduced.

The deactivation rate has increased by 4.2% which is all driven by prepaid activity. After a system change in fiscal 2005 all relevant prepaid SIOs were automatically given a recharge period of 12 months, extended from the normal 6 month period. In the last quarter of fiscal 2006, these SIOs reached the end of this period and many were subsequently deactivated. This contributed to the deactivation of 1.1 million prepaid SIOs in fiscal 2006. This change in recharge period has not impacted the year on year growth rate but has impacted the timing of deactivations occurring throughout the year.

18



Internet and IP SolutionsOur operating revenue from IP and internet services is driven primarily by:

• demand for capacity to support business networking;

• the increased use of IP services by business customers (small to medium enterprises);

• the introduction of new products to meet customer needs;

• the increased use of the Internet by businesses and consumers;

• the movement of our customers from basic access and associated calling products to other access services such as ADSL; and

• demand for greater bandwidth services such as broadband.

While the IP and internet markets have been experiencing growth, competition has put pressure on our prices. We expect that these trends will continue.

(i) Telstra mobile broadband and Telstra internet direct (Retail ADSL) are not included in retail broadband revenue and subcriber numbers.

Our narrowband products allow customers to connect to the internet from any telephone line in Australia. Our broadband products allow customers to experience an “always on” connection to the Internet, although this is not available to all lines due to technology limitations. In fiscal 2006, continued demand for capacity combined with competitive pricing has resulted in customers migrating their narrowband services to broadband. This trend placed additional price pressure on our narrowband products and resulted in a significant decline in our narrowband revenues.

We offer a range of internet products and packages under our BigPond brand. Telstra BigPond home and business packages offer dial-up modem services to residential and business customers across Australia.

Internet & IP SolutionsYear Ended 30 June


Narrowband . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220 275 (55) (20.0%)Retail broadband . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 730 463 267 57.7%Wholesale broadband . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 461 261 200 76.6%Internet direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 123 20 16.3%IP solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 207 78 37.7%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 48 20 41.7%Total internet & IP solutions revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,907 1,377 530 38.5%

Broadband subscribers - retail (in thousands) (i) . . . . . . . . . . . . . . . . . . . . . . . . . . 1,476 856 620 72.4%Broadband subscribers - wholesale (in thousands). . . . . . . . . . . . . . . . . . . . . . . . . 1,427 888 539 60.7%Total Broadband subscribers (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,903 1,744 1,159 66.5%

Narrowband subscribers - retail (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 1,205 (178) (14.8%)

Total online subscribers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,930 2,949 981 33.3%

Average revenue per retail broadband subscriber per month ($'s) . . . . . . . . . . . . . . . 52.16 60.10 (7.94) (13.3%)


19



Telstra BigPond broadband provides broadband internet services to consumer and business customers via HFC (Hybrid Fibre Coaxial) cable, ADSL, satellite and mobile access technologies.

During fiscal 2006, our internet and IP solutions revenue grew by 38.5% or $530 million to $1,907 million, despite a reduction in prices. The subscriber base for our broadband products grew significantly during this time, partially due to migration from narrowband products but also due to growth in the overall online market. As at 30 June 2006, we had approximately 2.9 million broadband customers, nearly 1.5 million retail customers. There has been a significant rise in demand resulting from competitive pricing strategies.

Narrowband revenue decreased to $220 million in fiscal 2006. This decline highlights the growing impact of dial-up to broadband migration as the dial-up market proceeds with its decline. We expect this trend to continue with further price adjustments likely to occur as broadband prices fall and customers require higher speeds.

Retail broadband revenue increased by 57.7% to $730 million in fiscal 2006, mainly due to strong increases in SIOs. SIO growth has occurred across all technologies but ADSL has been the key driver of the growth.We have introduced a number of key price and value campaigns to stimulate broadband take up including a combination of discounting access and installation offers. We have also introduced new products and plans including a wireless EVDO offer and enhanced focus on our cable offerings. The Australian Government’s Higher Bandwidth Incentive Scheme (HiBIS) and broadband regional connect packages have also enabled affordable broadband and higher bandwidth to be provided to regional and remote locations and encourage take up in those areas. Given this strong take up, increased competition and resultant price offerings, average revenue per user has declined across the majority of products.

Wholesale broadband revenue increased by 76.6% to $461 million in fiscal 2006 driven by a continuing strong market demand for high bandwidth services. Wholesale DSL internet grade has grown by$181 million driven by volume increases with a 60.7% growth in SIOs.

Internet direct is our business oriented internet access product with a range of data access options and features to meet the needs of business. Internet direct revenue increased by 16.3% during fiscal 2006 to $143 million. The result was driven by our virtual ISP product which increased by $14 million, mainly because of a new commercial deal signed resulting in a significant increase in data usage. SIOs for this product category increased by 258% in fiscal 2006.

IP solutions revenue increased by 37.7% to $285 million in fiscal 2006, mainly due to the products in this category being in the growth phase of their lifecycle. Fiscal 2006 saw an increase of $48 million in IP MAN/Ethernet, our ‘next generation’ data access services which provide high speed IP and Ethernet access solutions respectively for large and medium corporate enterprises. The government sector has been the key user and driver of this product. IP WAN grew by $29 million, after growth was stimulated through competitive pricing and improved network performance. It is also evident that customers now appear more willing to move towards IP based solutions.

Other internet and IP solutions revenue grew by $20 million due to growth in wholesale internet and data traffic, in particular in our Wholesale Ethernet product, and increased revenue from our wholly owned entity, Chief Entertainment which is a media production house that provides internet content.

20



ISDNISDN is a flexible, switched network based on digital technology. It can support many applications at one time (such as voice, data and video) while using a single access point to the network. ISDN services are offered to residential and business customers across Australia. Our ISDN products revenue is impacted by offerings and packages in the broadband market, growth in the number of DSL enabled exchanges and migration to advanced data products such as IP solutions.

(i) Statistical data- we have adjusted comparative data to show a more accurate reflection of the market. Conversion factors have been adjusted in calculating ISDN access lines.

ISDN access revenue has declined marginally to $418 million in fiscal 2006. Growth in access lines has slowed in recent years from 3.3% in fiscal 2005 to 0.5% in the current year. Data access line declines in the consumer segment have been driven by customer movement to broadband, whilst declines in the business segment have arisen as a result of the migration to alternative technologies such as ADSL, symmetrical HDSL. Data access line declines have been offset by voice access line growth, driven by customers taking up ISDN as a stepping stone towards a full IP environment. Whole of customer discounts in the enterprise segment have also impacted the result in the current year.

ISDN voice calls revenue, which is made up of local, national and international voice calls made on the integrated services digital network, declined by 10.9% or $33 million in fiscal 2006, mainly due to declines in the local and national categories. National voice calls revenue was negatively impacted by competitor price pressure during the year. Local voice calls revenue was negatively impacted by a decrease of 14% in minutes of use primarily because calls on our Priority® One3 and 1300 A Party products have been reclassified from ISDN to inbound calling revenues. This reclassification amounted to $13 million in fiscal 2006.

ISDN data calls revenue declined in fiscal 2006 by 28.5% or $47 million. Both ISDN local and national data calls contributed to the decline. ISDN local data and ISDN national local data calls revenue declined by 28% and 32% respectively due to customers migrating to alternative products such as ADSL and symmetrical HDSL, as a result of improved bandwidths at reduced prices in each of these products.

ISDNYear Ended 30 June


Access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 418 421 (3) (0.7%)Data calls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 165 (47) (28.5%)Voice calls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271 304 (33) (10.9%)Total calls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 389 469 (80) (17.1%)Total ISDN revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807 890 (83) (9.3%)

ISDN access lines (basic access line equivalents) (in thousands) (i) . . . . . . . . . . . . . . . 1,214 1,208 6 0.5%


21



Specialised Data

Specialised data revenue is comprised mainly of revenue from frame relay, digital data services and leased lines. Frame relay offers high speed data transmission from 64kb to 45Mb per second to customers connecting any number of sites to other national or international locations. It is frequently used as a building block to construct corporate wide area networks. Digital data services provide high quality, leased line digital data transmission offering dedicated bandwidth from 1.02Kb to 1,984Kb per second, which may be used for communication between all major capital cities, and most regional and country areas in Australia. Analogue leased lines provide high quality, low cost, low bandwidth and dedicated end-to-end connections between customer sites.

During fiscal 2006, total specialised data revenue decreased to $884 million, reflecting a decline in mature products such as frame relay, digital data and leased line services. This decline has been driven by product substitution to more technologically advanced IP and DSL based product options, included with our internet and IP solutions revenue category.

Frame relay revenue decreased as this product enters the declining stages of its product life cycle with customers migrating to new technologies such as Business DSL which offers the same coverage and similar assurance, but at a lower price. In addition, we introduced price discounting to retain existing customers. Reduced frame relay revenue was due to a combination of a reduction in ports by 11.8% with an equivalent reduction in revenue per customer.

Digital data services are mature products that declined 12.8% to $198 million during fiscal 2006 primarily due to customers transferring to newer technologies and price pressures experienced from alternative products.

Leased line revenues have experienced a 2.6% reduction to $229 million, mainly due to customers with voice graded dedicated lines moving to DSL, wireless or IP telephony based solutions. Other high capacity products such as wideband have grown. New business has also been generated by offering premium packages in combination with Internet Direct but they tend to be short distance services which are low revenue generating.

Specialised dataYear Ended 30 June


Frame Relay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 305 351 (46) (13.1%)ATM. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 89 1 1.1%Digital data services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 227 (29) (12.8%)Leased lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 235 (6) (2.6%)International private lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 26 4 15.4%Other specialised data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 38 (6) (15.8%)Total data revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884 966 (82) (8.5%)

Domestic Frame access ports (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 34 (4) (11.8%)


22



Advertising and DirectoriesOur advertising and directories revenue is predominantly derived from our wholly owned Sensis group. Sensis provides innovative advertising and local search solutions through a print, online, voice, wireless and satellite navigation network.

The majority of Sensis’ revenue is derived from its print and online directories - Yellow Pages® and White Pages® - which have grown steadily overall due to the introduction of new print and directory advertising initiatives.

Product innovation and customer demand continue to drive growth in our broader online and electronic advertising and non-directories advertising business.

Yellow Pages revenue increased by 5.8% to $1,172 million, primarily due to the strong performance in our non-metropolitan books and 54% growth in Yellow Pages® OnLine revenue. The growth in non-metropolitan books has been driven by new category guides and subheadings, higher uptake of half page advertisements and the release of three new local directories. Online performance was driven by a 25% rise in Yellow Pages OnLine display customer numbers and higher uptake of Platinum advertising, leading to increased yields.

During fiscal 2006, White Pages® revenue grew by 12.2% to $302 million, reflecting continued growth in both print and online, with improved sales force effectiveness through better “go to market” strategies. Growth has continued with the success of coloured listings and logos resulting in higher revenue per customer.

Our emerging businesses delivered 17.1% revenue growth, driven by strong growth in Whereis® location-based search revenues and in MediaSmart®. Fiscal 2006 includes a full year of revenue for our mapping and travel related products company Universal Publishers.

We also acquired QuickCut and Adstream in February 2006. This business provides a unique software and online interface which allows advertising content to be stored, repurposed and distributed across a wide range of media. This business contributed a further $8 million for the year.

Overall revenue performance was impacted by a decline in Classifieds revenue over the period. This was driven by competition and economic weakness in the Sydney and Melbourne markets.

Advertising and DirectoriesYear Ended 30 June


Advertising and Directories revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 1,585 126 7.9%

23



Intercarrier ServicesOur operating revenue from intercarrier services comprises a number of products and services relating to the provision of telecommunications services to other carriers (including REACH), CSPs and Internet service providers (ISPs). The majority of this revenue base is derived from interconnect and access services which is a highly regulated area of the Australian telecommunications market. Interconnection revenues relating to our PSTN and mobile products are included in those product categories. The remaining revenue component in intercarrier services is derived from wholesale specific product offerings such as facilities access, wholesale transmission and ULL which, while they are subject to significant price pressures resulting from ongoing oversupply of capacity in the market place, are a focus for delivering incremental revenue growth for us in the coming years.

Intercarrier Services revenue has grown by 21.0% to $351 million due to increases in facilities access, wholesale transmission solutions and other wholesale revenues mainly consisting of ULL.

Our growth in facilities access was 40.7% or $24 million for the year largely driven by demand for equipment building and mobile tower access as other carriers and service providers have sought to expand their infrastructure over time.

Growth in wholesale transmission relates to leased transmission services led by a rise in demand from internet service providers for backhaul transmission to expand their DSL network coverage. Partly offsetting the overall increase in intercarrier revenue was the unfavourable impact of a backdated rate adjustment for MCI Worldcom in September 2005 as well as a decline in services leased by the same customer.

Other Wholesale revenue growth of $18 million is due to ULL which has been driven by a number of factors such as:

• carriers have reached customer density thresholds on wholesale DSL and resale PSTN to be able to undertake viable ULL; and

• falling equipment prices have reduced the capital required by carriage service providers to undertake ULL build.

Intercarrier servicesYear Ended 30 June


Intercarrier services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 290 61 21.0%

24



Inbound Calling ProductsOur operating revenue from inbound calling products consists principally of the fees we charge our business customers for the provision of inbound calling numbers:

• for Freecall™ 1800, the cost of the call, charged to the party called, with no cost incurred by the caller;

• for Priority® 1300 and Priority® One3:

• the calling party from a PSTN service incurs a cost of 25 cents (including GST) from anywhere in Australia. Different charges apply for calls made from ISDN, mobiles and payphones; and

• the service owner incurs the other components of the call charges as applicable.

Also included is revenue from enhanced call centre products using network voice processing, which provides access to advanced call handling capabilities, without customers having to purchase and maintain their own networks.

Our inbound calling products revenue therefore is driven by two different streams, the caller (A party) and the lessee of the inbound service (B party). The A party revenues are affected by substitution to other voice products such as mobiles and the Internet. B party revenues are affected by increased customer competition impacting prices.

Revenue from inbound calling products remained steady at $449 million in fiscal 2006 mainly due to an increase in Priority® One3 and 1300 A Party products offset by Priority® One3 and 1300 B Party products.

Our overall revenue from Priority®One3 and 1300 B Party products declined in fiscal 2006 due to very competitive market pressures resulting in lower returns. Minutes of use and services in operation have actually increased in this category of calls, but large customers are being won or retained at lower prices resulting in reduced revenues. This is offset by higher call volumes on our Priority® One3 and 1300 A Party products after calls from our ISDN and Siteline products to these numbers were reclassified in the current year to inbound calling. This amounted to $13 million in fiscal 2006. There is also an increasing trend for calls to these numbers being made from mobile phones which resulted in the revenue being recorded as mobiles revenue.

Revenue from Freecall™ 1800 has declined mainly due to intense price competition leading to reduced price and a declining customer base. Our other inbound calling products, such as Enterprise speech solutions, have continued to grow strongly throughout fiscal 2006.

Inbound calling productsYear Ended 30 June


Inbound calling products revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 449 0 0.0%

B Party minutes (in millions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,922 2,773 149 5.4%A Party calls (in millions). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,012 940 72 7.7%

3,934 3,713 221 6.0%


25



Full year results and operations review - June 2006Solutions ManagementOur operating revenue from solutions management is derived from managing all or part of a customer’s communications and IT solutions and services covering:

• managed network services which is network based voice and data products, including IP based networks and IP telephony, CPE management, radio networks and new wireless based technologies;

• IT services which is managed customer infrastructure (e.g. desktop and end user devices), managed storage and security services, in addition to hosting and application development. IT services also includes the provision of professional consulting and deployment services; and

• other refers to our eBusiness solutions and global data centre.

In fiscal 2006, solutions management revenue increased 6.2% or $58 million mainly due to increases in IT services.

IT services grew by 10.5% or $60 million in the current year mainly due to our wholly owned entity KAZ winning major contracts, one of which was a five-year contract for an estimated $200 million to provide the Department of Defence’s Central Office IT Infrastructure Support Services. Fiscal 2006 IT services revenue also included an additional $12 million due to a full 12 months of results for KAZ compared to only11 months in the previous fiscal year. Managed professional services revenue also contributed to the growth in IT services, with an increase of $16 million due mainly to increased project work on an existing contract.

In addition to increases in IT services, managed data, managed WAN and managed radio, which are in ‘managed network services’, all contributed positively to the revenue growth due mainly to increases in a number of existing contracts. Managed voice however offset this growth in revenue, declining due to the scaling back of some of our existing contracts in this area.

Solutions managementYear Ended 30 June


Managed network services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 337 337 - 0.0%IT services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 632 572 60 10.5%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 22 (2) (9.1%)Solutions management revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 989 931 58 6.2%

26



Offshore Controlled EntitiesThe offshore controlled entities category relates to our offshore subsidiaries, which provide a variety of products and services within their various regions of operation. Included in this category are the following significant offshore controlled entities:

• CSL New World Mobility Group (CSLNW), which generates its revenues from the Hong Kong mobiles market. CSLNW was formerly known as Hong Kong CSL Limited, though in March 2006 this entity merged with Hong Kong based mobile company New World PCS. As result of this transaction, we own 76.4% of the merged entity;

• TelstraClear, which generates its revenues from providing full integrated services to the New Zealand market; and

• other offshore controlled entities predominantly in the Telstra Enterprise and Government segment, which mainly generate revenues from the provision of global communication solutions to multinational corporations through our interests in the United Kingdom, Asia and North America.

Consolidated revenue from offshore controlled entities increased in fiscal 2006 primarily due to the following factors:

• CSLNW experienced revenue growth across the majority of its revenue streams except for local voice, which continues to be impacted by sustained pricing pressure. The merger between Hong Kong CSL and New World PCS resulted in increased revenue in the current year of $64 million. Excluding this component, revenue has grown in both prepaid and postpaid categories after increased subscribers and handset revenue due to recent promotional activity. Revenue growth was also assisted by a $11 million favourable foreign exchange rate impact.

• TelstraClear experienced a net decline in revenue of 0.8% to $620 million. There were significant declines in calling revenues largely due to price erosion and pricing plan reductions in the Internet and IP business due to heavy retail competition. Revenue was also negatively impacted by the NZ$ exchange rate, causing a $22 million decline. These declines were mostly offset by strong growth in the business sector and an increased contribution from a full year’s ownership of the Sytec business. There were also a number of one-off implementation revenues from the provision of new and/or additional services to a number of key customers.

• The 17.1% growth in revenue to $295 million from other offshore controlled entities was mainly due to growth in Europe, Asia and the US. In Europe, the inclusion of a full 12 months ownership of PSINet contributed $15 million in revenue growth. Both Telstra Singapore and Telstra Hong Kong started to grow revenue by selling the full suite of international data products in the Asia market. KAZ also exhibited strong growth in the same region due to the synergies gained by combining this business with our telecommunications business in one bundle to customers. Growth in the US of $15 million was mainly the result of a major contract to provide telecommunications solutions over an integrated global IP-based network, contributing $12 million to revenue growth.

Offshore controlled entities - revenueYear Ended 30 June


CSL New World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 830 734 96 13.1%TelstraClear . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 620 625 (5) (0.8%)Other offshore controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 295 252 43 17.1%Total offshore controlled entities revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745 1,611 134 8.3%

27



For further detail regarding our major off shore subsidiaries CSLNW and TelstraClear refer to the business summaries on pages 40 and 41.

Payphones

Payphone revenue declined by 14.0% to $104 million in fiscal 2006, impacted by substitution to other products, particularly prepaid mobile phones and competitors’ prepaid calling cards. As a result of this migration, we removed a number of low usage phones resulting in a 3.2% reduction in the number of Telstra owned and operated payphones. There has also been a decline in privately owned and operated payphones of 10.0%, as private operators removed their support for unprofitable payphones. Telstra owned and operated payphones also reduced due to the loss of some payphones to private operators and lower demand in new growth locations.

Pay TV Bundling

Total pay TV bundling revenue grew by $57 million, comprising FOXTEL $46 million and AUSTAR$11 million.

FOXTEL bundled services revenue grew by 20.0% or $46 million after an increase in subscribers and higher revenue per user. As customers have migrated from analogue to digital services, discount plans have been phased out and customers are upgrading their packages. The growth in subscribers was driven by low price installation/upgrade offers made to the market along with the FOXTEL 10th Anniversary promotion, which targeted both new customers and existing customers through digital migration. FOXTEL IQ, an interactive digital feature available to all FOXTEL digital subscribers also performed well, aided by a low installation price point campaign. At 30 June 2006, analogue services in operation represented 14.7% of FOXTEL bundled customers compared with 36.8% at the start of the year.

PayphonesYear Ended 30 June


Payphone revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 121 (17) (14.0%)

Telstra owned and operated payphones (thousands) . . . . . . . . . . . . . . . . . . . . . . . 30 31 (1) (3.2%)Privately owned and operated payphones (thousands) . . . . . . . . . . . . . . . . . . . . . 27 30 (3) (10.0%)Total number of payphones (in thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 61 (4) (6.6%)


Pay TV BundlingYear Ended 30 June


Pay TV Bundling revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 263 57 21.7%

FOXTEL Pay TV Bundling subscribers (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . 292 280 12 4.3%Austar Pay TV Bundling subscribers (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . 51 55 (4) (7.3%)Total Pay TV Bundling subscribers (thousands) . . . . . . . . . . . . . . . . . . . . . . . . . . . 343 335 8 2.4%


28



AUSTAR bundled services revenue growth for fiscal 2006 of $11 million was driven by an increase in the average revenue per user after a change in the subscription offerings. Subscriptions however, fell due to lower advertising activity, which resulted in slower sales rates while the disconnection rate remained consistent.

Customer Premises Equipment

Customer premises equipment (CPE) revenue increased by 18.6% to $274 million mainly driven by strong growth in the sales of PBX equipment and communication packages known as Telstra Business Systems (TBS) packages. TBS sales more than tripled in the current fiscal year due to an expansion of the vendor base combined with new carriage pricing plans and investment made in support tools that enabled improved processing and reduced transaction time.

The current year’s revenue also includes a full 12 months of operations for Telstra Business Systems Pty Ltd (formerly known as Damovo (Australia) Pty Ltd) as it was acquired September 2004. We also acquired Converged Networks Pty Ltd, Western Australia’s largest CPE dealer in April 2006.

This growth was partially offset by an $11 million decline in first phones/extensions due to continued substitution of rental phones due to sales of CPE and mobiles.

Other Sales and Services

In fiscal 2006, operating revenue from other sales and services increased by 2.4% or $18 million mainly due to HFC cable usage and external construction revenue.

HFC cable usage includes revenue received from FOXTEL for carriage services, cable installations and service calls. Revenue increased by A$19 million this year due to FOXTEL promotional activity which resulted in an increase in services in operation. There was also a scheduled FOXTEL contract rate increase during the period.

Customer premises equipmentYear Ended 30 June


Customer premises equipment revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 231 43 18.6%

Other sales and services revenueYear Ended 30 June


Telstra information and connection services . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 134 (14) (10.4%)Customnet and spectrum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 112 (2) (1.8%)Virtual private network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 15 2 13.3%Card services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 59 (9) (15.3%)Security products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 33 1 3.0%HFC cable usage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84 65 19 29.2%Conferlink . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 47 1 2.1%Commercial and recoverable works . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 58 (1) (1.7%)External construction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 85 23 27.1%Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 133 (2) (1.5%)Total other sales and services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759 741 18 2.4%

29



External construction, which delivers communications network infrastructure solutions, had revenue growth of 27.1% or $23 million in fiscal 2006. This growth can be mainly attributed to increased activity relating to the construction of the 3G 2100 network in conjunction with our joint venture partner, Hutchison.

The above increases were partially offset by a $14 million decline in information and connection services revenue as a result of lower call volumes. Also, card services declined by 15.3% or $9 million. This was due to products such as Homelink 1800 and telecard being mature products and are being impacted by substitution to more cost effective convenient products such as pre-paid cards and mobiles.

Other Income

In fiscal 2006, total other income increased by 25.7% or $67 million.

In fiscal 2006 proceeds from sale of investments of $93 million were due mainly to the sale of Xantic and Fundi Software Pty Ltd, with Xantic yielding a net gain of approximately $58 million. In fiscal 2005, proceeds from the sale of our investments was mainly made up of the sale of our interests in Intelsat Limited, Infonet Services Corporation and the redemption of the convertible note issued by PCCW.

The majority of the growth in government subsidy revenue was sourced from Higher Bandwidth Incentive Scheme (HiBIS) receipts and the broadband Connect Australia scheme, which can be attributed to an increase in the provision of broadband services to regional, rural and remote areas of Australia. Refer to the Internet and IP products section for further details regarding HiBIS.

Other IncomeYear Ended 30 June


Proceeds from sale of property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . 46 51 (5) (9.8%)Proceeds from sale of investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 252 (159) (63.1%)Asset/investment sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 303 (164) (54.1%)

Cost of property, plant & equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23) (42) 19 (45.2%)Cost of investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (31) (173) 142 (82.1%)Cost of asset / investment sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (54) (215) 161 (74.9%)Net gain/loss on assets/investment sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 88 (3) (3.4%)

USO Levy Receipts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 63 (5) (7.9%)Government subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135 71 64 90.1%Miscellaneous income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 39 11 28.2%Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 173 70 40.5%Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 328 261 67 25.7%

30



Full year results and operations review - June 2006Operating Expenses

In fiscal 2006, our total operating expenses (including share of net (gain)/loss from jointly controlled and associated entities) was $17,603 million, compared with $15,507 million in fiscal 2005. One of the major drivers of the 13.5% increase was the inclusion of a restructuring and redundancy provision of $427 million, which has impacted all three of the expense categories. Our operating expenses have been impacted by the following factors:

• costs associated with transformational initiatives and certain project write-offs;

• increased costs associated with network rehabilitation;

• higher redundancy expense as a result of reduced staff numbers as efficiencies have been achieved;

• higher goods and services purchased costs due to increased marketing campaign activities and new offers aiming to stimulate sales growth in a range of our products and services;

• the benefit of ongoing cost control programs, including the consolidation of vendors and IT systems;

• growth in our communications plant asset base, along with the impact of a service life review of our asset base to align with the transformation program, has increased our depreciation and amortisation expense during fiscal 2006; and

• the consolidation of additional operating expenses of $68 million in fiscal 2006 from our acquisition activity including the merger between CSL and New World PCS, as well as the inclusion of a full fiscal year of expenses relating to entities we acquired in fiscal 2005. These included Universal Publishers from December 2004, Telstra Business Systems (formerly Damovo (Australia) Pty Ltd) from September 2004, PSINet from August 2004, and KAZ from July 2004.


$m $m $m (% change)

Labour expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,364 3,858 506 13.1%Goods and services purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,730 4,211 519 12.3%Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,427 3,815 612 16.0%

13,521 11,884 1,637 13.8%Share of net (gain)/loss from jointly controlled and associated entities . . . . . . . . . . . . (5) 94 (99) (105.3%)

13,516 11,978 1,538 12.8%Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,087 3,529 558 15.8%Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,603 15,507 2,096 13.5%

31



Labour ExpenseLabour expense includes:

• salary, wages and related on-costs, including superannuation costs, share based payments, workers’ compensation, leave entitlements and payroll tax;

• costs of engaging contractor labour and agency costs; and

• restructuring costs, including redundancy expenses.

In the table below, our domestic full time employees include domestic full time staff, domestic fixed term contracted staff and expatriate staff in overseas subsidiary entities. Domestic full time employees do not include employees in our offshore subsidiary entities, or casual and part time employees. Our full time employees and equivalents include the total of our domestic and offshore full time employees, and casual and part time employees measured on an equivalent basis. Our total workforce includes domestic and offshore full time, casual and part time employees as well as contractors and staff employed through agency arrangements measured on an equivalent basis.

During fiscal 2006, we have undertaken a comprehensive review of the sources of our workforce numbers and this has resulted in a restatement of our workforce figure as at the end of fiscal 2005. For 30 June 2005, we previously reported domestic full time employees of 39,657, full time employees and employed equivalents of 46,336 and total workforce of 51,764. We have revised these numbers for fiscal 2006 reporting purposes after standardising our subsidiary entities’ methodology for reporting workforce numbers and reviewing some of our data capture systems. We have also revised the way we count staff on long term leave to exclude them from both the opening and closing staff balances to enable us to better manage the business. Staff on long term leave will be excluded from the balance for future reporting.

The vast majority of the net impact of the changes relates to the number of contractors and agency staff.

(i) Excludes offshore, casual and part time employees. June 2005 balance has been restated, refer to details above.(ii) Includes all domestic and offshore employees, including those of our subsidiary entities. June 2005 balance has been restated, refer to

details above.(iii) Includes all domestic and offshore employees, including subsidiary entities as well as contractors and agency staff. June 2005 balance has

beenrestated, refer to details above.

During fiscal 2006, our total workforce decreased by 6.2% or 3,262 full time equivalent staff, contractors and agency staff. This decrease is predominantly due to specific efforts across the business to rationalise the number of people working for the Telstra group as part of our business transformation initiatives. During the

Labour expenseYear Ended 30 June


Labour expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,364 3,858 506 13.1%

Domestic full time employees (whole numbers) (i). . . . . . . . . . . . . . . . . . . . . . . . . 37,599 39,680 (2,081) (5.2%)Full-time employees and employed equivalents (whole numbers) (ii) . . . . . . . . . . . . . 44,452 46,227 (1,775) (3.8%)Total workforce , including contractors and agency staff (whole numbers) (iii) . . . . . . . 49,443 52,705 (3,262) (6.2%)

Reduction in total workforce in fiscal 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,262)Reduction in total workforce in fiscal 2006 excluding impact of New World merger . . . . (3,859)


32



year, our subsidiary Hong Kong CSL merged with New World PCS, which resulted in the Telstra Group acquiring 597 new employees. Excluding the impact of the New World PCS merger on staff numbers, our total full time equivalent staff, contractors and agency staff reduced by 3,859 full time equivalent staff.

We incurred redundancy expenses of $348 million in fiscal 2006 compared with $91 million in fiscal 2005. The higher redundancy expense reflects the implementation of cost control initiatives to improve the efficiency of our operational structure. In addition, a further $186 million of redundancy expense is included as part of a restructuring and redundancy provision as at year end to account for the redundancies over the next 2 years that are considered to have arisen as part of the business restructure.

Our labour expense increased by 13.1% in fiscal 2006 mainly due to:

• the increased levels of redundancy and the redundancy provision referred to above;

• salary increases averaging between 2% and 4% for employees as specified in our enterprise agreements and as per the normal annual salary review process; and

• a full year of ownership of several subsidiaries acquired part way through fiscal 2005 (such as KAZ and Telstra Business Systems), and acquisition of new entities such as the New World Mobility group and a controlling interest in Adstream.

The above increases in labour expense were partially offset by cost reductions associated with the 6.2% decrease in the number of employed staff, contractors and agency staff.

Excluding the impact of redundancy expense, labour expense increased by 1.7%.

Based on the latest detailed actuarial report provided on the financial position of the Telstra Superannuation Scheme (Telstra Super) as at 30 June 2003, we have reported that a surplus in this superannuation fund continues to exist. In accordance with the recommendations within the actuarial investigation, we were not expected to, and did not make employer contributions to Telstra Super during fiscal 2006 and fiscal 2005. As at 30 June 2006, the vested benefits index (the ratio of fund assets to members’ vested benefits) of the defined benefit divisions of Telstra Super was 115%. Our contributions to Telstra Super will recommence when the vested benefit index of the defined benefit divisions falls to 103%.The continuance of our contribution holiday is dependent on the performance of the fund and the level of contributions required to meet employer obligations.

In fiscal 2006, we recognised $185 million of pension costs in our labour expenses compared with$203 million in fiscal 2005. This expense is due to the relevant A-IFRS standard requiring us to recognise the actuarially defined movement in our defined benefit pension plans in our operating results.

33



Goods and Services PurchasedGoods and services purchased includes core costs of our business that vary according to business activity. The largest component of this expense category is network payments, which are payments made to other carriers to terminate international and domestic outgoing calls and international transit traffic. Other significant items includes the costs of mobile handsets and internet modems, costs of mobile sales (including subsidy costs, usage commissions and dealer incentives), managed services costs (including service contractors, sub-contractors and leases), service fees (predominantly in relation to our pay television services) and paper purchases and printing costs.

Our goods and services purchased increased in fiscal 2006 mainly due to higher cost of goods sold, mobile handset subsidies and network payments. Increases were experienced across most categories within goods and services purchased except for usage commissions and paper costs. Additionally, a restructuring provision of $54 million has been raised in relation to the replacement of EVDO cards and additional customer and dealer costs associated with the shut down of our CDMA network in the future.

Our goods and services purchased increased by 12.3% to $4,730 million in fiscal 2006 due to the following factors:

• the inclusion of the full financial year of expenses relating to our subsidiary entities acquired part way through the prior fiscal year, including KAZ, Telstra Business Systems (formerly Damovo (Australia) Pty Ltd), PSINet and Universal Publishers. In fiscal 2006, we also acquired New World PCS, the consolidation of which has caused an increase of goods and services purchased expense of$29 million;

• a rise in cost of goods sold mainly due to higher sales volumes for mobile handsets, primarily driven by increased market campaign activity, strong BigPond broadband demand, costs of supporting the Commonwealth Games, together with sales growth in other product categories such as EVDO, CPE for small business customers, Managed WAN equipment and voice related products. Also contributing to the increase are payments made to Brightstar, in accordance with our procurement agreement with them to centrally source wireless devices from global suppliers with a view to achieving cost savings. Inclusive of these payments, the Brightstar arrangement has provided net savings of approximately $70 million, primarily relating to handset costs;

• an increase in mobile handset subsidies, attributable to a rise in the take up of handsets on subsidised plans as well as higher average subsidies offered, especially following a significant campaign

Goods and services purchasedYear Ended 30 June


Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 917 726 191 26.3%Usage commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281 289 (8) (2.8%)Handset subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 504 424 80 18.9%Network payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,002 1,904 98 5.1%Service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 273 46 16.8%Managed Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 190 52 27.4%Dealer performance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 41 72 175.6%Paper purchases and printing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 159 (12) (7.5%)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 205 - 0.0%Total goods and services purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,730 4,211 519 12.3%

34



undertaken in the last quarter, whereby a greater range of handsets are being subsidised. As a result, our average subscriber acquisition cost has increased from $120 to $137. In addition, the CSL New World Mobility Group has implemented a more aggressive handset subsidy policy in order to increase handset sales. In fiscal 2006, we have also made an A-IFRS accounting policy change to expense handset subsidies as incurred, as opposed to previously deferring and amortising them over the contract period. The prior year comparative figure has been adjusted to allow a like for like comparison;

• network payments continued to grow due to volume increases of domestic mobile and SMS traffic terminating on other carriers’ networks, partially offset by a reduction in the average mobile terminating rate. Additionally, expansion and growth in our UK, USA and Asian operations have driven growth in our offshore outpayments. Also attributable to this increase is higher outbound roaming revenue, partly offset by a reduction of costs through routing traffic to overseas carriers that offer lower prices and favourable foreign exchange variations in our New Zealand operations. Additional Network Access Charges were also incurred as a result of our 3G 2100 partnership activities with Hutchison;

• service fees increased by 16.8% to $319 million in fiscal 2006 led by a rise in bundling of pay television services due to growth in bundled FOXTEL subscribers;

• managed services costs grew by 27.4% to $242 million in fiscal 2006, mainly attributable to increased third party maintenance and service costs for the support of customer contracts. There are also a number of reclassifications from other expenses such as service contracts, service fees and consultancy amounting to $26 million. Offsetting this increase are decreases due to lease renegotiations;

• growth in dealer performance commissions, mainly attributable to increased proactive sales activity in our personal calling program. New dealer payments resulting from the implementation of the new dealer remuneration model have also contributed to the growth; and

• an increase in other goods and services purchased due to the inclusion of a restructuring provision of A$54 million in fiscal 2006, offset by a decrease in commercial project payments as described below.

These increases were partially offset by a decrease in other goods and services expenses such as usage commissions, commercial project payments and paper purchases and printing costs:

• usage commissions decreased by $8 million mainly as a result of the discontinuation of commission payments to Keycorp following our acquisition of their Transaction Network Solutions business during the year. This was partly offset by increased dealer commissions mainly associated with non-mobile related products, including BigPond products;

• commercial project payments declined from $59 million in fiscal 2005 to $34 million in fiscal 2006 mainly relating to a lower level of deferral and amortisation of our basic access installation costs. The expense fluctuates in accordance with our installations over the five prior years. An equivalent amount is amortised into revenue and hence there is no EBIT impact. Also contributing to the decline was a change in the line usage billing arrangement for outsourced faxstream costs; and

• paper purchase and printing costs decreased from $159 million in fiscal 2005 to $147 million in fiscal 2006 due to savings achieved through printing contract discounts, together with a reclassification of expenses into cost of goods sold. There was also a reduction in printing costs relating to superannuation industry contracts after a push towards the use of online notifications.

35



Other Expenses

Our other expenses were $4,427 million in fiscal 2006 and $3,815 million in fiscal 2005, representing a 16.0% increase year on year. A restructuring provision of $137 million was raised at year end mainly relating to property rationalisation, cancellation of server leases, the decommissioning of certain IT platforms and operational and business support systems and related stock obsolescence. Excluding the impact of the provision, our total other expenses grew by 12.5% to $4,290 million.

Our other expenses in fiscal 2006 include an additional $17 million of expenses attributable to the merger of CSL with New World PCS during the period. In addition, a full twelve months of expenses have been included in fiscal 2006 for KAZ, PSINet, Universal Publishers, and Telstra Business Systems (formerly Damovo), which were acquired part way through fiscal 2005.

The movement in the significant categories of other expenses is discussed below.

The largest component within this expense category is service contracts and other agreements. The expense increased from $1,556 million in fiscal 2005 to $1,836 million in fiscal 2006, mainly driven by the following factors:

• increased network maintenance and rehabilitation activity;

• costs associated with transformational initiatives;

• maintenance of the existing 3GSM 2100 MHz network and the operational expenditure relating to the construction of the new 3GSM 850 MHz network;

• volume based increases including installations for digital pay television, as well as increased activations and fault rectifications for BigPond products due to product growth; and

• a rise in consultancy costs associated with the company transformation activity and increased market research activity due to a focus on understanding customer needs.

The above increases are partly offset by savings from the renegotiation of a major vendor contract, a reduction in mainframe server lease charges as well as the completion of consulting work from fiscal 2005.

General and administration expenses decreased from $806 million in fiscal 2005 to $793 million in fiscal 2006. This was driven by lower IT costs resulting from savings achieved in repairs and maintenance through continued infrastructure consolidation. The closure of an IT system and the decommissioning of an IT platform have also contributed to reduced IT related costs. Discretionary costs such as seminars and

Other expensesYear Ended 30 June


Property and IT rental expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 559 572 (13) (2.3%)Net foreign currency conversion losses/(gains) . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 (40) 42 (105.0%)Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 7 1 14.3%Service contracts and other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,836 1,556 280 18.0%Promotion and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 330 26 7.9%General and administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 806 (13) (1.6%)Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 394 150 38.1%Impairment and diminution expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 329 190 139 73.2%Total other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,427 3,815 612 16.0%

36



conferences, travel and entertainment costs have decreased in fiscal 2006 as a result of a strong focus on cost reduction. Legal costs have however risen in the year due to increased litigation and other legal work, especially around the C7 case (refer to note 27 of the annual report for further details), operational separation issues and various project initiatives.

Other operating expenses increased from $394 million to $544 million during fiscal 2006 primarily due to the provision for restructuring of $105 million raised in this category. Excluding the impact of the provision, our other operating expenses increased by $45 million. This was largely driven by lower construction activity resulting in higher operations and maintenance activity being expensed.

Property and IT rental expense decreased by 2.3% to $559 million, mainly due to reduced PC leasing costs driven through a consolidation of server leases, which has enabled us to negotiate contracts at a more competitive rate. The decommissioning of an old IT platform and the consolidation of various vendor contracts have also contributed to the decrease in IT rental costs.

Our promotion and advertising costs increased by 7.9% to $356 million during fiscal 2006 mainly due to increased spend during the Commonwealth Games, as well as more marketing activity in the face of increased competition and efforts to stimulate revenue.

Our impairment and diminution expense has increased from $190 million in fiscal 2005 to $329 million in fiscal 2006, mainly attributable to the retirement of a number of IT assets and increased costs associated with the cancellation of partially completed capital projects after a review of project direction as part of our transformation strategy. Also included in fiscal 2006 is a provision relating to restructuring of $32 million. Our inventory write down expense has also risen due to increased write-offs in our construction business, as well as the impact of our active promotion of mobile handsets, causing slow moving stock to be written off more quickly. This increase is partly offset by the decrease in our bad and doubtful debts, which decreased from $150 million in fiscal 2005 to $139 million in fiscal 2006. Improved credit management performance has led to lower provision requirements and write-offs, as well as fewer payments to external debt collection agents.

Net foreign currency conversion costs represents the remaining foreign currency exposure after taking into account our hedging activities. The loss of $2 million in fiscal 2006 compared with a gain of $40 million in fiscal 2005 is mainly due to an A-IFRS accounting adjustment relating to the REACH capacity prepayment, which was processed in fiscal 2005.

37



Share of net (gain)/loss from jointly controlled and associated entities

Our share of net (gain)/loss from jointly controlled and associated entities includes our share of both profits and losses from equity accounted investments.

In fiscal 2005, we entered into an agreement with our joint venture entity, REACH, which included a commitment to fund half of REACH’s committed capital expenditure for a period until 2022. Under A-IFRS, this transaction was deemed to be part of our investment in REACH and resulted in equity accounted losses being recognised in the fiscal 2005 year.

The current year equity accounting gain has arisen after improved performance from our joint venture entity Xantic prior to its sale.

Depreciation and AmortisationOur depreciation and amortisation expense remains a major component of our cost structure, reflecting our expenditure on capital items.

Our depreciation and amortisation expense has risen by 15.8% to $4,087 million in fiscal 2006. During fiscal 2006, we have undertaken a strategic review of the service lives of our assets as part of the transformation strategy. As a result, we have accelerated depreciation and amortisation by $422 million mainly relating to the CDMA network, our switching systems, certain business and operational support systems and related software.

Excluding the impact of the review, our depreciation and amortisation grew by 3.9% to $3,665 million, mainly attributable to:

• growth in our communications plant asset base, which is consistent with our level of capital expenditure over recent years; and

• consolidation of $16 million of depreciation and amortisation expenses from our newly merged entity, New World PCS, along with the inclusion of a full 12 months of depreciation and amortisation expenses relating to entities acquired in fiscal 2005.

Share of net (gain)/loss from jointly controlled and associated entitiesYear Ended 30 June


Share of net (gain)/loss from jointly controlled and associated entities . . . . . . . . . . . . (5) 94 (99) (105.3%)

Depreciation and amortisationYear Ended 30 June


Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,183 2,876 307 10.7%Amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 904 653 251 38.4%Total depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,087 3,529 558 15.8%

38



Net Finance Costs

Our borrowing costs are influenced by:

• our debt level;

• interest rates;

• our debt maturity profile;

• our interest payment profile; and

• our level of cash assets (affects net debt).

In fiscal 2006, our net debt levels increased from $11,772 million to $13,057 million. This increase was driven by our cash requirements to fund the payment of the fiscal 2005 final dividend and the fiscal 2006 interim dividend, both of which included a 14c per share ordinary dividend and a 6c per share special dividend. This level of dividend payments is higher than in previous periods and hence, required an increase in our borrowing levels. No decision has been made with respect to the level of payment of future dividends.

The higher level of net debt has driven an increase in our net finance costs despite the fact that our net cost of debt has declined marginally during the year. The reason for the decline in average cost of debt is that long term bonds which were issued at historically high interest rates are maturing and being refinanced at the current, comparatively lower, interest rates.

Income tax expense

In fiscal 2006, our income tax expense decreased by 21.0% to $1,380 million. The primary driver of the reduction in tax expense is lower profits for the year compared to fiscal 2005.

In fiscal 2006, the effective tax rate increased to 30.3% compared with the effective tax rate of 28.8% in fiscal 2005. The higher effective tax rate is due to a change in the taxation adjustments for items that have different treatments for accounting and taxation purposes, such as equity accounted FOXTEL losses and the depreciation of certain items of plant and equipment. In addition, the current year tax expense includes an amount for under provision of tax in the prior year that is $34 million higher than the amount included in fiscal 2005 for under provision in fiscal 2004.

Net finance costsYear Ended 30 June


Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,002 963 39 4.0%Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66) (83) 17 (20.5%)Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 880 56 6.4%

Income Tax ExpenseYear Ended 30 June


Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380 1,746 (366) (21.0%)

Effective Tax Rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30.3% 28.8% 1.5%

39



Full year results and operations review - June 2006Major Subsidiaries - Financial SummariesBelow is a summary of the major reporting lines for our three largest subsidiaries: Sensis, TelstraClear and CSL New World Mobility. This information is in addition to the product analysis previously provided in the document and is intended to show these businesses as stand alone entities.

Sensis Financial Summary

Amounts included for Sensis represent the contribution included in Telstra’s consolidated result.

We are a leading provider of advertising and search services through our advertising business Sensis and its respective subsidiaries. Sensis provides innovative advertising and local search solutions through a print, online, voice, wireless and satellite navigation network.

The 6.9% increase in sales revenue to $1,826 million has primarily been driven by advertising and directories revenue as described in the Advertising and Directories product discussion. The growth in this area has been driven by good performance in White Pages and Yellow Pages print and online. The inclusion of acquired entities in fiscal 2006 has also contributed to growth in the current year.

Operating expenses increased by 6.3% due mainly to the following:

• Labour expenses grew by $18 million due to organic growth of the workforce, redundancy costs and a $10 million write back of a deferred expense provision;

• Cost of goods sold increased by $14 million after the inclusion of a full 12 months of results from Universal Publishers acquired mid way through fiscal 2005; and

• Increased depreciation and amortisation expense by $27 million after commissioning new software, the inclusion of amortisation for Universal Publishers and Adstream and the revision of certain software service lives as part of Telstra’s transformation program.

Cost management and growing yields and margins in print and online led to EBITDA growth of 10.2% in fiscal 2006.

Sensis financial summaryYear Ended 30 June

2006 2005 Change Change$m $m $m %

Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,826 1,708 118 6.9%Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,827 1,708 119 7.0%Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (917) (863) (54) 6.3%EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,001 908 92 10.2%EBIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910 845 65 7.7%CAPEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 83 17 20.5%

EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54.8% 53.2% 1.6%

40



CSL New World Mobility Group Financial SummaryIn February 2001, we acquired a 60% ownership interest in CSL. We paid US$1,694 million ($3,085 million), including incidental acquisition costs, to acquire this controlling interest. In June 2002, we acquired the remaining 40% ownership interest in CSL as part of our redemption of a convertible note from PCCW.In March 2006, we merged the CSL entity with New World PCS to form the CSL New World Mobility Group (CSLNW). This transaction involved us exchanging a 23.6% share in CSL and receiving a a controlling interest in the merged group of 76.4%.

CSLNW operates in the highly competitive Hong Kong mobile market and has delivered revenue growth in fiscal 2006 despite a difficult operating environment, characterised by significant market competition and local voice price erosion. CSL and New World PCS have retained their own brandings as they target different market segments. CSL remains Hong Kong's premium provider of mobile voice and data services whilst New World PCS targets value conscious customers with a low cost business model. The merged entity provides a much broader customer base for growth.

Note: Amounts presented in HK$ have been prepared in accordance with A-IFRS.Amounts presented in A$ represent amounts included in Telstra’s consolidated result including additional depreciation and amortisation arising from consolidation fair value adjustments.Amounts include 3 months of New World PCS in fiscal 2006.

Total income increased by 12.1% or HK$523 million in fiscal 2006. The majority of the increase resulted from the inclusion of the New World PCS business from March 2006. This resulted in an 8.7% increase in total income year on year. The remaining revenue growth was driven by rising data, international voice, and prepaid revenues offset by a decline in local voice revenues after sustained pressure on prices. Mobile handset revenue also increased after recent handset promotions.

Total operating expenses increased by 15.7% mainly due to the following:

• the incorporation of costs after the merger with New World PCS;

• increased subsidies as part of heightened promotional activity to drive sales; and

• higher offshore outpayments associated with higher international voice revenues.

Depreciation and amortisation expense increased as CSLNW is now carrying higher network assets due to the roll out of their 3G network. EBITDA increased by 9.3% or HK$118 million whilst EBIT decreased by 5.4% or HK$39 million due to the impact of higher depreciation.

CSLNW continues to enhance its 3G network and promote 3G services through the deployment of pioneering technology and innovative applications. In February 2006, the company announced the launch of Hong Kong’s first 3G Mobile TV service enabling customers to enjoy a variety of news and “infotainment” stations.

CSL New World financial summaryYear Ended 30 June Year Ended 30 June

2006 2005 Change 2006 2005 ChangeA$m A$m % HK$m HK$m %

Total income . . . . . . . . . . . . . . . . . . . . . . . . 833 735 13.3% 4,831 4,308 12.1%Total expense. . . . . . . . . . . . . . . . . . . . . . . . (757) (648) 16.8% (4,145) (3,583) 15.7%EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240 217 10.6% 1,390 1,272 9.3%EBIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77 87 (11.5%) 686 725 (5.4%)CAPEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 128 (23.4%) 568 755 (24.8%)

EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . 28.8% 29.5% (0.8%) 28.8% 29.5% (0.8%)

41



TelstraClear Financial SummaryTelstraClear, the second largest full service carrier in New Zealand, has been operating in its current form since December 2001. In December 2001, we merged our 50% owned joint venture, TelstraSaturn and CLEAR Communications, to form TelstraClear. As part of this transaction, we acquired an additional 8.4% interest in the merged entity and began the consolidation of 58.4% of TelstraClear’s results. In April 2003, we acquired the remaining 41.6% interest in TelstraClear and consolidated 100% of TelstraClear’s results from that date.

Note: Amounts presented in NZ$ represent the New Zealand business excluding intercompany transactions and have been prepared in accordance with A-IFRS. Amounts presented in A$ represent amounts included in Telstra’s consolidated result and include the Australian dollar value of adjustments to consolidate TelstraClear into the Group result.

In fiscal 2006, revenue increased by 2.5% to NZ $693 million for the following reasons:

• the full year impact of the national HomePlan offering in the consumer segment; and

• the current year included the first whole year of Sytec revenue after its acquisition in November 2004.

These increases were offset by:

• access and call revenue declines in the wholesale and small to medium enterprise segments due to price erosion caused by competition in the market. This was moderated by growth in our customer bases in those segments; and

• Internet revenues have declined, particularly in the second half, as reduced pricing plans have impacted yield in the business segment.

Total operating expense increased by 2.6% to NZ $713 million due to the following:

• an increase in outpayments due to higher revenue; and

• a small increase in labour expenses driven by the inclusion of a full year of Sytec costs.

TelstraClear’s acquisition of local ICT service provider, Sytec Resources Limited in November 2004 and its controlled entities was an important step to leverage TelstraClear’s existing service capability and provided growth and opportunities in this segment in fiscal 2006. New Zealand is a strategically important market for our trans-Tasman customers and the combination of TelstraClear and Telstra enables us to provide customers on both sides of the Tasman with seamless communication and IT solutions.

TelstraClear financial summaryYear Ended 30 June Year Ended 30 June

2006 2005 Change 2006 2005 ChangeA$m A$m % NZ$m NZ$m %

Total income . . . . . . . . . . . . . . . . . . . . . . . . 620 625 (0.8%) 693 676 2.5%Total expense. . . . . . . . . . . . . . . . . . . . . . . . (645) (648) (0.5%) (713) (695) 2.6%EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 112 (0.9%) 124 122 1.6%EBIT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25) (24) 4.2% (20) (19) 5.3%CAPEX . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126 115 9.6% 141 125 12.8%

EBITDA margin . . . . . . . . . . . . . . . . . . . . . . . 17.8% 18.0% (0.1%) 17.9% 18.0% (0.2%)

42



REACH REACH is primarily focused on meeting the increasing needs of its shareholders, Telstra and PCCW, as well as third party voice and satellite services. We are the premier provider of international voice and satellite services in Asia via the operation and management of the most diverse high-speed network in the region.

In February 2001, we sold our global wholesale business, including certain offshore controlled entities, to REACH in exchange for 50% ownership in REACH.

Since the original transaction, REACH has been operating in a difficult environment. Prices for international voice and data carriage have fallen, but growth in usage has not been sufficient to compensate for the loss in revenue caused by the price reductions. Consequently, we have previously been required to make a write down of our investment, reducing the carrying value to nil. Equity accounting was suspended at that date and remains suspended. As a result, our share of net profits/ (losses) in relation to REACH are not booked in the Telstra Group results.

Fiscal 2006 operational performance of the business continued to track according to plan with a focus on consolidation of a new operating model. Data volumes continue to grow strongly and voice business volumes are stable. REACH has also recently signed a memorandum of understanding (MOU) with a consortium of entities to plan and develop a proposal to build an international undersea cable linking South East Asia with the United States of America (USA). In addition, in October 2005, Reach announced the launch of the first stage of its international IP enabled Next Generation Network.

43



Cash flow

(i) Please note: Due to the implementation of A-IFRS, we have revised the presentation of the cash flow summary and our statutory reported statement of cash flows. This has resulted in some reclassifications between our key cash flow totals (net cash provided by operating activities, net cash used in investing activities and net cash used in financing activities). Consequently, the 2005 comparative totals disclosed for these lines have changed from the amounts disclosed as at 30 June 2005. The most significant change is the reclassification of our finance costs paid from operating into financing, and the reclassification of interest received from operating into investing.

Net cash provided by operating activitiesOur primary source of liquidity is cash generated from our operations. Net cash provided by operating activities includes receipts from trade and other receivables, payments to suppliers and employees, income tax paid, and GST received, paid and remitted to the Australian Taxation Office.

During fiscal 2006, net cash provided by operating activities decreased by 4.4% to $8,562 million. Higher revenue and lower working capital items were offset by higher expense payments. The key drivers of our increased revenue were our mobiles and broadband products. Our higher expense payments were mainly due to increased labour costs, in particular redundancy payments, our variable operating expenditure items that increase with revenue and our service contracts and agreements expenditure.

In addition, our cash paid to the Australian Taxation Office was $164 million higher in fiscal 2006 than in fiscal 2005 due to a low tax instalment rate requiring us to make a larger final tax payment in respect of the 2005 fiscal year. The timing of the final payment fell into the 2006 fiscal year.

Cash flow dataYear Ended 30 June


Receipts from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,229 24,526 703 2.9%Payments to suppliers/employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (14,785) (13,848) (937) 6.8%Net cash generated by operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,444 10,678 (234) (2.2%)Income tax paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,882) (1,718) (164) 9.5%Net cash provided by operating activities (i). . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,562 8,960 (398) (4.4%)

Net cash used in investing activities (i) (see table below) . . . . . . . . . . . . . . . . . . . . . (4,012) (3,766) (246) 6.5%Operating cash flow less investing cash flow (i) . . . . . . . . . . . . . . . . . . . . . . . . . . 4,550 5,194 (644) (12.4%)

Movements in borrowings/finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 493 1,393 (900) (64.6%)Employee share loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 19 5 26.3%Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,970) (4,124) (846) 20.5%Share buy-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (756) 756 -Finance costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (940) (879) (61) 6.9%Purchase of shares for employee share plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) - (6) -Net cash used in financing activities (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,399) (4,347) (1,052) 24.2%

Net increase/(decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (849) 847 (1,696) (200.2%)

44



Net cash used in investing activitiesNet cash used in investing activities represents amounts paid for capital assets and investments, offset by cash receipts from the sale of capital assets and investments, and other cash receipts from our investing activities.

In fiscal 2006, our expenditure on operating capital, intangibles and investments amounted to $4,303 million, an increase of 4.2% on the previous fiscal year. This growth was driven by our next generation network transformation program, which is part of our ongoing strategy of transforming the business.

The increases in our operating capital expenditure were across most capital expenditure categories, with the exception of minor decreases in customer access and specialised network functions. The drivers of our operating capital expenditure for fiscal 2006 were as follows:

• higher domestic switching as a result of our wireline transformation program, which involves building a new IP core and the next generation ethernet transmission network. Further expenditure was also incurred to cater for increasing demand for broadband ADSL and specialised wideband services;

• higher transmission expenditure to support the new 3GSM 850 network and to provide capacity to support increased broadband demand for digital subscriber line (DSL) technology;

• lower expenditure on customer access due to the achievement of operational efficiencies and the use of new IP ADSL technology at a lower unit cost;

• significantly higher expenditure on our mobile networks primarily due to 2 items: payments to Hutchison amounting to $312 million for the purchase of a 50% share of their 3GSM 2100 network, acquired in fiscal 2005 but payment was deferred until fiscal 2006; and costs incurred in relation to

Net cash used in investing activitiesYear Ended 30 June


Switching . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 452 338 114 33.7%Transmission . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 426 358 68 19.0%Customer access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800 870 (70) (8.0%)Mobile telecommunications networks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,043 497 546 109.9%International assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 338 279 59 21.1%Capitalised software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556 523 33 6.3%Specialised network functions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237 291 (54) (18.6%)Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 340 377 (37) (9.8%)Operating capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,192 3,533 659 18.7%Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63 6 57 950.0%Capital expenditure before investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,255 3,539 716 20.2%Add: investment expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 590 (542) (91.9%)Capitalised expenditure and investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,303 4,129 174 4.2%Sale of capital equipment, investments and other proceeds . . . . . . . . . . . . . . . . . . . (139) (244) 105 (43.0%)Proceeds from other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (86) (76) (10) 13.2%Repayment of loans to jointly controlled and associated entities . . . . . . . . . . . . . . . - 37 (37) -Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66) (78) 12 (15.4%)Dividend received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (2) 2 -Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,012 3,766 246 6.5%

45



the roll out of our own 3GSM 850 network. Most of the expenditure incurred on the 3GSM 850 network relates to installing and updating our base stations to enable them to carry the new network. During fiscal 2006, we installed 3,500 base stations out of an intended long term program in excess of 5,000 base stations;

• higher expenditure on international assets, predominantly related to the purchase of additional international transmission capacity to facilitate increased internet traffic with the United States;

• marginally higher expenditure on capitalised software as we embark on a 3 to 5 year program of transformational projects. In this early stage of the program we have been through a process of rationalising and streamlining our software applications; and

• lower expenditure on specialised network functions due to the postponement of a number of projects while we undergo a review process to ensure alignment of each project with our strategic direction. The expenditure we made during the year was mainly in relation to improving the reliability and robustness of the network and on improving the IP telephony network infrastructure platform.

Our expenditure on investments and other intangibles amounted to $111 million in fiscal 2006, compared with $596 million in fiscal 2005. Investment expenditure was significantly higher in fiscal 2005 predominantly due to our acquisitions of KAZ and PSINet.

In fiscal 2006, our cash payments for investments and intangibles resulted from the following items:

• $56 million for the acquisition of the TNS business assets and customer bases from our associated entity Keycorp Limited;

• $21 million for the acquisition of a further 25% of the issued share capital of Adstream Australia Limited, to increase our shareholding to 58% making Adstream a controlled entity;

• $5 million cash contribution to our joint venture entity FOXTEL; and

• other minor investments.

In fiscal 2005, our cash payments for investments resulted from the following items:

• $340 million for the acquisition of 100% of the issued share capital of KAZ;

• $124 million for the acquisition of 100% of the issued share capital of PSINet;

• $66 million for the acquisition of 100% of the issued share capital of ESA Holding Pty Ltd and its controlled entity Damovo (Australia) Pty Ltd (now known as Telstra Business Systems), and Damovo HK Limited for $66 million; and

• $46 million for the acquisition of 100% of the issued share capital of Universal Publishers.

Our proceeds from the sale of capital equipment, sale of investments and other proceeds amounted to$139 million in fiscal 2006, compared with $244 million in fiscal 2005.

Our cash proceeds from asset sales in fiscal 2006 included the following:

• the sale of our share of Xantic B.V. of $89 million; and

• sale of property, plant and equipment for cash receipts of $50 million.

Our cash proceeds from asset sales in fiscal 2005 included the following:

• the sale of our 1.7% shareholding in Intelsat Limited for $69 million;

• proceeds from sale of property, plant and equipment of $68 million; and

• the sale of our 5.3% shareholding in Infonet Services Corporation for $65 million.

46



During fiscal 2006 and fiscal 2005 we also received cash from other investment transactions. These included:

• receipt of $42 million as part of the settlement of the merger transaction with New World PCS in fiscal 2006;

• receipt of $18 million from a share buy-back performed by Xantic prior to our disposal of our interest in the company in fiscal 2006;

• receipt of $16 million from our associated entity Keycorp, due to a return of capital return in fiscal 2006; and

• the redemption of the converting note issued by PCCW with a cash consideration of $76 million in fiscal 2005.

We expect to incur future capital expenditure in the following areas:

• meeting ongoing customer demand for existing products and services, while ensuring service levels are improved;

• developing new products and services to meet the changing needs of our customers;

• asset lifecycle management;

• providing additional coverage and depth on our 3G mobile network;

• upgrading our customer access network by delivering a new wireline IP core;

• further development of our broadband and online infrastructure to meet future growth;

• providing telecommunications services to rural and remote areas; and

• internal business support infrastructure to ensure continued productivity improvements, operational efficiencies and customer relationship process improvements.

We believe our cash flow from operating activities and available borrowings will be sufficient to meet our anticipated capital expenditure and investment requirements.

Net cash used in financing activities

Our net cash used in financing activities increased in fiscal 2006 by 24.2%.

A significant portion of our net financing cash outflows relate to payment of dividends and, in fiscal 2005,a share buy-back. The combined amount paid to shareholders in fiscal 2005 via dividends and the sharebuy-back was largely consistent with the amount paid to shareholders in fiscal 2006. In fiscal 2006, shareholders received the payment of two additional special dividends of 6c each per share, amounting to $1,494 million.

We also receive and repay significant amounts in relation to our borrowings which increase and decrease to match our working capital requirements and other business needs.

The net increase in cash used in financing activities is due to a higher net level of proceeds from our debt issuances in fiscal 2005. Our net proceeds from debt were high during fiscal 2005 due to the refinancing of debt which matured during the year and our need to increase our level of liquidity to fund dividend payments.

During the year, we received $8,641 million in borrowed funds and repaid $8,141 million. In fiscal 2005, we received $7,416 million in borrowed funds and repaid $6,007 million. This resulted in a net increase in cash outflow of $909 million. This position offsets the outflows from the payment of dividends and finance costs.

47



Balance Sheet

We continue to maintain a strong financial position with net assets of $12,832 million as at 30 June 2006 and $13,658 million as at 30 June 2005. The decrease in net assets of $826 million comprised an increase in total liabilities of $1,790 million offset by an increase in total assets of $964 million.

The movement in total assets of $964 million was primarily due to:

• cash assets decreased by $859 million partially due to the proceeds on our €1 billion bond issue being received just prior to 30 June 2005, which was subsequently invested in the short term money market. The current level of cash is more reflective of our normal cash holdings;

• our property, plant and equipment increased by $731 million, largely due to high capital expenditure on our network and our new wireline IP core driven by our next generation network transformation projects;

• other intangibles decreased by $242 million, mainly because the amortisation of our software assets was greater than our expenditure on new software during the year with the rationalisation and streamlining of many of our software applications as part of our business transformation; and

• other non current assets increased by $1,142 million mainly due to an increase in the actuarially determined value of our defined benefit pension asset.

Balance SheetYear Ended 30 June


Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 689 1,548 (859) (55.5%)Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,190 4,034 156 3.9%Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,879 5,582 (703) (12.6%)Non current assetsProperty, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,622 22,891 731 3.2%Intangibles - goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,073 2,037 36 1.8%Intangibles - other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,050 4,292 (242) (5.6%)Other non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,551 409 1,142 279.2%Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,296 29,629 1,667 5.6%Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,175 35,211 964 2.7%

Current liabilitiesBorrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,969 1,507 462 30.7%Other current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,917 4,905 1,012 20.6%Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,886 6,412 1,474 23.0%Non current liabilitiesBorrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,409 10,941 468 4.3%Other non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,048 4,200 (152) (3.6%)Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,457 15,141 316 2.1%Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,343 21,553 1,790 8.3%Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832 13,658 (826) (6.0%)

EquityTelstra Entity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,586 13,656 (1,070) (7.8%)Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 2 244 -Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832 13,658 (826) (6.0%)

48



The movement in total liabilities of $1,790 million was primarily due to:

• total borrowings, current and non-current, increased by $930 million. This increase reflects our need to increase our level of liquidity during the year to fund our various working capital and business requirements, along with two special dividend payments made during the fiscal year;

• other current liabilities increased by $1,012 million primarily due to an increase in our trade creditors and accruals reflecting the large amount of activity, in particular construction activity, undertaken toward the end of the fiscal year. In addition, included in both current and non-current liabilities, we have provided for restructuring and redundancy expenses planned to be incurred as part of our transformation of the business over the next two years; and

• other non-current liabilities decreased by $152 million primarily due to a change in our cross currency swap position in line with currency movements and our hedging requirements.

49


Corporate Governance and Board Practices

Corporate Governance and Board PracticesCorporate ObjectiveThe Telstra Board has determined that:

The Telstra Board is committed to best practice in the area of corporate governance. Our main corporate governance and board practices in place during fiscal 2006 are described in this section and, where appropriate, elsewhere in our annual report, as indicated. Further information regarding our corporate governance and board practices (including copies of key policies and charters) can also be found on our website, www.telstra.com.au/abouttelstra/corp/governance.cfm.

We regularly review and update our corporate governance practices. The Board evaluates and, where appropriate, implements relevant proposals with the aim of ensuring that we maintain best practice in corporate governance, having regard to developments in market practice as well as new corporate governance requirements and guidance notes issued by the Australian Stock Exchange (ASX), the New York Stock Exchange (NYSE), the US Securities and Exchange Commission (SEC) and other regulators.

We comply with the ASX Corporate Governance Council’s “Principles of Good Corporate Governance and Best Practice Recommendations” released in March 2003.

The Board of DirectorsRole and responsibilities of the Board

The directors are accountable to shareholders for the management of our business and affairs and the Board is responsible to shareholders for our overall strategy, governance and performance. The Board’s role includes:

• determining the corporate objective which is the foundation for all the actions and decisions of the Board and management;

• providing strategic direction to the Company by approving the corporate strategy and associated performance objectives, monitoring developments and approving any variations;

• approving significant business decisions;• approving the annual corporate plan;• overseeing the review and update of corporate governance practices and procedures as necessary to

support its commitment to best practice corporate governance in Australia and globally;• appointing, assessing the performance of and determining the remuneration of the CEO, overseeing the

performance of senior management and reviewing management succession plans and senior management remuneration arrangements;

• overseeing shareholder reporting and communications;• requiring appropriate compliance frameworks and controls to be in place and operating effectively;• monitoring the integrity of internal control and reporting systems and monitoring strategic risk

management systems;• reviewing and approving our statutory accounts and overseeing our financial position;• approving decisions concerning our capital, including capital restructures and share buybacks, and

determining our dividend policy; and• ensuring we comply with the reporting and other requirements of the Telstra Corporation Act.

The Board has adopted a charter that details the role and responsibilities of the Board and its members.

Telstra’s corporate objective is to create long-term shareholder value through providing integrated communication, information and entertainment services and customer focussed solutions.

50



The Board has delegated responsibility for day-to-day management of the Company to the CEO and has put a formal delegations structure in place which sets out the powers delegated to the CEO and those specifically retained by the Board.

Board membership, size and composition

The maximum number of directors provided for by our constitution is 13 and we currently have 8 directors on the Board.

A casual vacancy to the Board may be filled or an additional director appointed, up to the maximum number of directors, either by:

• the directors after consulting with the Communications Minister; or

• an ordinary resolution of shareholders.

Any new director appointed by the Board is subject to re-election at the next annual general meeting following his or her appointment.

The tenure of the CEO as a director is linked to his executive office, while one third of all other directors are subject to retirement by rotation each year. In accordance with the ASX Listing Rules, no non-executive director may serve past the third AGM following their most recent re-election or 3 years (whichever is longer) without submitting themselves for re-election. The directors to retire by rotation are those who have been longest in office determined from the date of their last election.

Prior to each annual general meeting, the Board will determine if the Board will recommend to the shareholders that they vote in favour of the re-election of the directors due to stand for re-election, having regard to those directors’ annual performance reviews and any other matters it considers relevant.

The Nomination Committee may negotiate the retirement or resignation of individual directors after consultation with the Board. However, the Board’s general policy on Board membership for non-executive directors is that, in general, directors are encouraged to retire at 72 years of age and the maximum tenure is 12 years (usually four terms of three years).

A brief biography for each director setting out their experience and expertise, together with details of the year of initial appointment and re-election (where applicable) of each director, is outlined in the Directors’ report.

Role of the chairman

The chairman is an independent director and is appointed by the Board. The chairman’s principal responsibilities are to ensure that the Board fulfils its obligations under the Board Charter and as required under the relevant legislation and to provide appropriate leadership to the Board and Telstra. The chairman also has specific responsibilities which include:

• representing the views of the Board to all shareholders and maintaining appropriate ongoing contact with major shareholders to ensure the Board understands their views;

• establishing the timetable and working with the CEO and company secretary to agree the agenda for Board meetings;

• chairing Board meetings and shareholder meetings;

• facilitating Board discussions with the aim of ensuring that:

• the discussions are conducted in an open and professional manner where directors are encouraged to express their views, leading to objective, robust analysis and debate; and

• the core issues facing us are addressed;

51



• working with the CEO to ensure the CEO provides the Board with the information it requires to contribute effectively to the Board decision making process and to monitor the effective implementation of Board decisions;

• guiding and promoting the on-going effectiveness and development of the Board and individual directors; and

• ensuring the meetings of shareholders are conducted in an open and proper manner with appropriate opportunity to ask questions.

Director Independence

It is the Board’s current policy that the CEO is the only executive director. It is also the Board’s current intention that the non-executive directors are also independent directors as defined in the Board Charter. With the exception of the CEO, all directors are non-executive directors and each non-executive director is considered by the Board to be independent.

Generally speaking, an independent director is a director who is independent of management and free of any interest and business or other relationship that could, or could reasonably be perceived to, materially interfere with the exercise of the director’s unfettered and independent judgment, and ability to act in our best interests.

The Board, at least annually, assesses the independence of each director. In assessing each director’s independence, the Board considers the effect of a director’s business and other relationships and interests from both our perspective and that of the director and has regard to a specific set of criteria set out in the Board Charter. These criteria are consistent with the definition of independence set out in the best practice recommendations of the ASX Corporate Governance Council and the requirements of the NYSE. Materiality is assessed on a case-by-case basis from both our perspective and that of the relevant director and having regard to the director’s individual circumstances.

Meetings of the Board

The Board meets for both scheduled meetings and on other occasions to deal with specific matters that require attention between scheduled meetings. The regular business of the Board includes strategic matters, governance, oversight, senior executive appointments, performance and remuneration, financial matters, risk management, compliance, and relationships with stakeholders including the Commonwealth. The Board also liaises with senior management as required and may consult with other Telstra employees and advisers and seek additional information.

Details of the number of meetings held by the Board during fiscal 2006 and attendance by Board members are set out in the Directors’ report.

Performance Evaluation

The Board regularly reviews its performance (including its performance against the requirements of the Board Charter), the performance of individual committees and the performance of individual directors. In fiscal 2006, the Board engaged an external consultant to facilitate this review.

As noted earlier, the Board makes recommendations to shareholders regarding the re-election of directors having regard to the outcome of such reviews.

52



Declaration of Interests

Directors are required to take all reasonable steps to avoid actual, potential or perceived conflicts of interest.

The Corporations Act, our constitution and the Board Charter require directors to disclose any conflicts of interest and to generally abstain from participating in any discussion or voting on matters in which they have a material personal interest. A director who believes he or she may have ceased to be independent, or who believes that he or she may have a conflict of interest or material personal interest in a matter, is required to disclose the matter in accordance with the relevant Corporations Act and constitutional requirements and follow the procedures developed by the Board to deal with such circumstances.

Board access to management and independent professional advice

Directors have complete access to our senior management through the chairman, CEO or company secretary at any time. In addition to regular presentations by senior management to Board and Board committee meetings, directors may seek briefings from senior management on specific matters.

The Board has the authority to conduct or direct any investigation required to fulfil its responsibilities and has the ability to retain, at Telstra’s expense, such legal, accounting or other advisers, consultants or experts as it considers necessary from time to time in the performance of its duties. Further, each director has the right to seek independent professional advice at Telstra’s expense, subject to the prior approval of the chairman. All committees of the Board have access to independent professional advice on this basis.

Committees of the BoardThe Board committees assist the Board in the discharge of its responsibilities. The role of Board committees is to advise and make recommendations to the Board. There are four standing committees:

• Audit Committee;

• Nomination Committee;

• Remuneration Committee; and

• Technology Committee.

Details of the members of the Board committees during fiscal 2006 and their qualifications, committee meetings held in fiscal 2006 and the attendance of each committee member are set out in the Directors’ report. Following each committee meeting, the Board receives a report from the committee on its activities.

Each committee operates in accordance with a written charter approved by the Board. The Board appoints the members and the chairman of each committee. Membership of the Audit, Nomination and Remuneration Committees is confined to directors who are determined by the Board to be independent as defined in the Board Charter.

The role, function, charter, performance and membership of each committee are reviewed on an annual basis as part of the Board’s evaluation process. Each committee:

• undertakes an annual assessment of its performance against the requirements of its charter and provides that information to the Board; and

• reviews and assesses the adequacy of its charter annually, discusses any required changes with the Board and ensures any revisions to the charter are approved by the Board.

In accordance with its policy of regular review, revisions to the charters for the Board and each committee were approved by the Board in June 2006.

53



Audit Committee

Role and responsibilities of the Audit Committee

The Audit Committee is a committee of the Board established to:

1. assist the Board in discharging its responsibilities by monitoring and advising on:a. financial reporting including:

i. the integrity, truth and fairness of the view given by our financial statements;ii. the integrity of our financial systems and processes; andiii. the appropriateness of our accounting policies and practices and consistency with current

and emerging accounting standards;b. our overall risk management process and the management of specific risk areas as directed by

the Board;c. the effectiveness and operation of our internal controls over financial operations and reporting;d. the effectiveness and operation of other aspects of our internal control environment as it sees fit;e. compliance with legal and regulatory requirements and company policies;f. the external audit including the external auditors’ qualifications, scope, independence and per-

formance and the non-audit services disclosures to be made in our annual report including the reasons for being satisfied that the auditors’ independence was not compromised by the provi-sion of these services;

g. the objectivity and performance of the internal audit function; and h. the structure and operation of our corporate governance framework and related disclosures;

2. provide a forum for communication between the Board, management and both the internal andexternal auditors; and

3. provide a conduit to the Board for external advice on audit, risk management and compliance mat-ters.

The Audit Committee approves the provision of recurring audit services as part of the annual approval of the audit plan. Additional audit and non-audit services are pre-approved by the Audit Committee provided they fall within a defined list of services specified by the Audit Committee. Those additional audit and non-audit services that are not listed have to be specifically approved by the Audit Committee prior to the commencement of any engagement. In addition, all non-audit services with a value over $100,000 must be separately approved by the Audit Committee, even if the service is listed as a pre-approved service. This is set out in greater detail in the Directors’ report.

Composition and membership of the Audit Committee

It is Board policy that the Audit Committee is comprised of at least three Board members, all of whom are independent as defined in the Board Charter and who will not, other than in his or her capacity as a member of the Board, Audit Committee or any other Board committee:

• accept directly or indirectly any consulting, advisory or other compensatory fee from us or any of our subsidiaries or any Board committee; or

• be an affiliated person of us or any of our subsidiaries.

Each member is required to:

• be financially literate (i.e. able to read and understand financial statements) and have sufficient financial knowledge to allow them to discharge their duties and actively challenge information presented by management, internal and external auditors;

54



• have a reasonable knowledge of us, the industries in which we operate and our risks and controls; and

• have the capacity to devote the required time and attention to prepare for and attend committee meetings.

In addition, the chairman of the Audit Committee must not be the chairman of the Board and no director may serve as a member of the Audit Committee if that director serves on the audit committee of more than two other public companies.

Meetings of the Audit Committee

Scheduled Audit Committee meetings are held on a regular basis, as determined annually in advance by the Board, scheduled to correspond with our financial reporting cycle. Additional meetings are also held as required.

Other members of the Board are entitled to attend Audit Committee meetings and the Audit Committee may ask management, the external auditors and/or others to attend meetings and provide such input and advice as required. The Audit Committee regularly meets with the internal auditor and the external auditors in the absence of management.

Audit Governance and Financial Reporting

Relationship with external auditor

In accordance with section 36 of the Telstra Act, it is a legislative requirement that the Auditor-General of Australia is our auditor for the purposes of the Australian Corporations Act. The Auditor-General has appointed an agent, Ernst & Young, to assist in performing independent external audit duties.

The Audit Committee has the authority and responsibility to select, evaluate and, where appropriate, replace the external auditor for filings outside of Australia. Through the Audit Committee, we have appointed Ernst & Young as our external auditor for filings outside Australia and in this respect and for the purposes of these audits, Ernst & Young is responsible for financial reporting purposes rather than the Auditor-General.

The Auditor-General, as our auditor, owes duties to us and our shareholders as a whole. The Auditor-General also owes statutory duties as an independent officer of the Commonwealth. Ernst & Young, as the external auditor appointed by us for filings outside Australia, is accountable to the Board, the Audit Committee and shareholders.

Restrictions on performance of non-audit services and auditor independence

For a summary of the restrictions placed on our auditors providing non-audit services and a summary of the auditors’ independence, see the Directors’ report.

External Auditor Rotation

As it is a legislative requirement that the Auditor-General is our auditor for the purposes of the Australian Corporations Act, the Auditor-General is not subject to rotation. During fiscal 2004 we, together with the Auditor-General, conducted a tender process in respect of our audit requirements and Ernst & Young was reappointed as the Auditor-General’s sub-contractor to assist the Auditor-General with our audit functions in Australia and as our auditor for our US and other overseas auditing requirements. It is our policy that a competitive tender for audit services is conducted every three to five years. The last rotation of the lead audit partner of our audit also occurred in fiscal 2004.

55



External Auditors’ Attendance at Annual General Meeting

Our external auditors attend our annual general meeting and are available to answer shareholder questions about the conduct of our audit and the preparation and content of the auditor’s report.

Audit Committee Processes

The Audit Committee:

• at least annually meets separately with our external auditors to discuss any matters that the Audit Committee or our auditors believe should be discussed privately;

• reviews the Directors’ report section of this annual report and considers whether the information is clearly understood and consistent with the Audit Committee’s knowledge about Telstra and its operations. In addition, prior to release, the Audit Committee reviews key elements of other related regulatory filings and discusses them with the external auditors as appropriate; and

• reviews the interim and annual financial statements and preliminary announcements and discusses them with the external auditors prior to their release to determine whether they are complete, reflect appropriate accounting principles, contain appropriate disclosures and are consistent with the information known to the Audit Committee.

Nomination Committee

Role and responsibilities of the Nomination Committee

The Nomination Committee is a committee of the Board established to assist the Board in discharging its responsibilities by monitoring and advising on:

• composition and performance of the Board;

• director independence; and

• appointment of the CEO.

Composition and membership of the Nomination Committee

It is Board policy that the Nomination Committee is comprised of at least three Board members including the chairman of the Board, all of whom are independent as defined in the Board Charter.

Each member is expected to:

• have a reasonable knowledge of us and the industries in which we operate; and


Meetings of the Nomination Committee

Meetings are held on a regular basis, as determined annually in advance by the Board. Additional meetings are also held as required.

Other members of the Board are entitled to attend Nomination Committee meetings and the Nomination Committee may invite other people including any of our employees to its meetings, as it deems necessary. However, if a person has a material personal interest in a matter that is being considered at a meeting, he/she must not be present for consideration of that matter.

56



Remuneration Committee

Role and responsibilities of the Remuneration Committee

The Remuneration Committee is a committee of the Board established to assist the Board in discharging its responsibilities by monitoring and advising on:

• remuneration of the Board;

• performance and remuneration of the CEO;

• performance and remuneration of senior management;

• remuneration strategies, practices and disclosures generally; and

• employee share and option plans.

The Committee also exercises the administrative powers delegated to it by the Board under our share option plans and, in certain circumstances, makes offers to employees under those plans.

Composition and membership of the Remuneration Committee

It is Board policy that the Committee is comprised of at least three Board members including the chairman of the Board, all of whom are independent as defined in the Board Charter.

Each member is expected to:

• be familiar with the current legal and regulatory disclosure requirements in relation to remuneration;

• have adequate knowledge of executive remuneration issues, including executive retention and termination policies, and short term and long term incentive arrangements;

• have a reasonable knowledge of us and the industries in which we operate; and


Meetings of the Remuneration Committee

Meetings are held on a regular basis, as determined annually in advance by the Board, scheduled to correspond with our remuneration review and reporting cycle. Additional meetings are also held as required.

Other members of the Board are entitled to attend Remuneration Committee meetings and the Remuneration Committee may invite other people including any of our employees to its meetings, as it deems necessary. However, if a person has a material personal interest in a matter that is being considered at a meeting, he/she must not be present for consideration of that matter.

Telstra’s Remuneration Framework

Information in relation to our remuneration framework (including information regarding our remuneration strategy and policies and their relationship to Company performance), together with details of the remuneration paid to Board members and senior executives who were the key management personnel of the Company during fiscal 2006, can be found in the Remuneration report included in the Directors’ report.

Each year, the Board reviews our CEO’s performance against agreed measures and considers the CEO’s compensation and entitlement to performance based remuneration. Each year, the CEO undertakes a similar exercise in relation to senior management. The results of the CEO’s annual performance review of senior management are considered by the Board.

57



Technology Committee

The Technology Committee is a committee of the Board established as a forum for the Board to review technology developments relevant to us and the industries in which we operate in greater detail than is possible at Board meetings. The Committee’s purpose is educative only.

Risk oversight and managementWe are committed to the management of risks throughout our operations. The role of the Board includes monitoring the integrity of internal control and reporting systems and monitoring the effectiveness of our management of strategic, financial, operational and compliance risks. The Audit Committee provides advice to the Board on the status of our business risks. The Audit Committee relies on the work undertaken by the risk management and assurance function, which independently assesses the adequacy and operating effectiveness of the controls in place surrounding the management of risk.

Primary responsibility for risk oversight and management lies with our management, who periodically review and update their significant business risks. The risk management and assurance function also plays a key role in this process by developing, promoting and transferring a common language and approach to the business units. This enables management to proactively identify, manage and control their risks. The Audit Committee regularly receives reports independently prepared by the risk management and assurance function on significant business risks with an evaluation as to the adequacy and effective operation of controls that are in place surrounding the strategies applied by business units to manage these risks.

The financial risk arising from our underlying business activities is largely managed through a central treasury function which applies a prudential approach. The central treasury function manages the liquidity, cash flow, foreign exchange, interest rate, borrowing and other financial terms and conditions, financial support arrangements, counterparty credit risk and derivatives. The treasury function’s principal objectives are to minimise the volatility of economic and financial outcomes and to establish sound operational controls.

We use insurance to transfer significant risk exposures arising in the key areas of property, public and product liability, and directors’ and officers’ liability and this is also managed on a group basis through the central treasury function. In view of our size, we accept substantial ‘excess levels’ and do not insure for risks that we can readily accommodate. Some risks cannot be effectively insured such as potential claims in relation to electromagnetic energy and business interruption.

Risk Management, internal compliance, control systems and our financial reports

The CEO and CFO have provided the Board with the certifications required by the Corporations Act and those recommended by the ASX Corporate Governance Council Recommendations in relation to our risk management and internal compliance and control systems and our financial reports.

The CEO and CFO have provided the Board with confirmation that, in all material respects, the Company’s financial reports for the year ended 30 June 2006 present a true and fair view of the Company's financial position and performance and are in accordance with relevant accounting standards. The CEO and CFO have confirmed this statement is made based on a sound system of risk management and internal compliance and control implemented in accordance with Board policy. In addition, the CEO and CFO have confirmed to the Board that the Company’s risk management and internal compliance and control systems, to the extent they relate to financial reporting, are operating efficiently and effectively in all material respects based on the risk management model adopted by the Company.

58



Telstra Values, Telstra Business Principles, Code of Conduct and other company policiesWe have a number of internal operating policies and principles which promote ethical and responsible decision making and timely and balanced disclosure.

Telstra Values, Telstra Business Principles and company policies

We provide guidance to our directors, senior management and employees on the practices, principles and standards of corporate and personal behaviour required of all of our officers and employees in performing their daily business activities through our Company Values, the Telstra Business Principles and our company policies (including our Code of Conduct). The Telstra Business Principles, the Code of Conduct and other company policies reinforce the standards of appropriate business and ethical behaviour we expect from all employees. We have a mandatory training program for all employees to reinforce these standards.

Whistleblower policy and service

We have in place a whistleblower policy and confidential whistleblower service which provides our staff with an avenue to raise concerns they might have with behaviour that is potentially illegal, improper or unethical. The whistleblowing process is supported by an independent service provider who specialises in receiving sensitive reports or disclosures. All reports or disclosures are treated as confidential and reports can be made anonymously. Reports are referred to Telstra's Ethics Committee, the management committee which oversees the investigation and implementation of any recommendations considered appropriate. In addition to generally supporting Telstra's ethical foundations, the Ethics Committee charter confirms that part of its role is to oversee our whistleblowing policy and process. Our whistleblowing policy reflects the Telstra Values of Accountability, Integrity, and Leadership, supports our Code of Conduct and complements existing management structures and functions.

Share Trading

We have in place a share trading policy that prohibits directors, the CEO, senior management and certain other employees (and their associates) from engaging in short-term trading of our securities (including the acquisition of derivatives and financial and other products issued or created over our shares by us or any third party). This policy also restricts the buying or selling of our securities to three “window” periods (between 24 hours and 1 month following the release of our annual results, the release of our half-yearly results and the close of our annual general meeting) and at such other times as the Board permits. Trading during these window periods is subject to the overriding requirement that buying or selling of our securities is not permitted at any time by any person who possesses price-sensitive information which is not generally available in relation to those securities.

In addition, directors, the CEO, senior management and relevant employees must notify the company secretary before they or their close relatives buy or sell our securities. Changes to the interests of directors in our securities are, as required by law, notified to the ASX.

Our share trading policy also prohibits our directors, the CEO, senior management, other employees and contractors from buying or selling securities of other companies (including shares, derivatives and financial and other products issued or created over those securities by the company or any third party) when in possession of price-sensitive information relating to that other company which is not generally available. This is so if the information is price-sensitive to the other company (and not generally available), even though it may not be price-sensitive information to us.

Further, directors, the CEO, senior management and relevant employees are also restricted from entering into arrangements which effectively operate to limit the economic risk of their security holdings in shares allocated under our share plans during the period the shares are held in trust.

59



Market disclosure

We have established procedures intended to ensure that we comply with our market disclosure obligations. In particular, we have in place a comprehensive continuous disclosure procedure which is reviewed and updated on a regular basis. The aim of this procedure is to ensure that we release price-sensitive information in a timely fashion to the various stock exchanges on which our shares and debt securities are listed.

Our procedure provides that:

• ultimate management responsibility for continuous disclosure rests with the CEO and the Chief Financial Officer (CFO);

• the responsibilities of the Continuous Disclosure Committee (Committee), which is chaired by the company secretary, include:

• ensuring that there is an adequate system in place for the disclosure of all material information to the ASX;

• advising the CEO and the CFO in relation to the disclosure of information reported to the Committee;

• the Committee’s membership includes the company secretary, a representative of Public Policy and Communications, the General Counsel - Finance & Administration, a representative from Finance & Administration and the General Manager - Investor Relations or their delegates;

• senior management (including Group Managing Directors other than the CFO and their direct reports, all financial controllers and certain legal and regulatory counsel) must immediately inform the Committee of any potentially price-sensitive information or proposal as soon as they become aware of it;

• in cases where material information has originated in the office of the CEO or the CFO or has been reported directly to them, the CEO or CFO may, in his or her discretion, seek the advice of, or a recommendation from, the Committee in deciding whether to make or approve an ASX announcement in relation to that material information;

• if the matter is disclosable, an announcement is prepared and immediately sent via the company secretary’s office electronically to all relevant stock exchanges.

We implement several practices internally to reinforce the importance of our continuous disclosure obligations and the need to keep the Committee informed about potentially disclosable matters. These practices are reviewed regularly and include the following:

• every director is made aware of our continuous disclosure obligations upon taking office and each member of senior management undertakes training with the General Counsel - Finance and Administration, in relation to our continuous disclosure obligations;

• a weekly email is sent to all senior management reminding them to notify the Committee immediately if they become aware of any potentially price-sensitive information or proposals;

• the Committee maintains a list of issues which, although not yet disclosable, are monitored in case they become disclosable;

• all proposed media releases and external speeches and presentations to be made by senior management are reviewed by internal legal counsel to determine whether they should be disclosed;

60



• a specific information paper is prepared for each Board meeting summarising ASX announcements and details of significant matters considered by the Committee but judged not to be disclosable; and

• the Office of the Company Secretary maintains a record of all market announcements made. The announcements are also posted on our website after market release is confirmed.

We also have in place an investor relations policy governing communications and the provision of information to external parties, including shareholders, brokers and analysts. The aim of this policy is to ensure that we provide investors and the financial community with appropriate and timely information whilst at the same time ensuring that we fulfil our statutory reporting obligations under the Corporations Act and the ASX Listing Rules.

Legal and Regulatory Compliance

We are committed to conducting our business in compliance with our legal and regulatory obligations. Compliance with these obligations is not just a legal requirement but is integral to our commitment to our employees, customers, shareholders and the community. Compliance is a key element of the Telstra Values which are the foundation for our cultural priorities and the way we pursue Telstra’s vision and mission.

The Board and the senior management team are committed to ensuring there is an appropriate compliance framework and complementary controls in place to provide an appropriate level of confidence that the Company is operating in compliance with relevant laws, regulations and industry codes. The Board has given the Audit Committee specific responsibility for reviewing our approach to achieving compliance with laws, regulations and associated industry codes in Australia and overseas and for the general oversight of compliance issues. This oversight is facilitated by the preparation of a regular and comprehensive compliance report summarising our compliance initiatives and issues.

We have recently reviewed and refined out internal approach to compliance and from the start of the 2007 fiscal year we have moved to combine our compliance activities and the related activities supporting our corporate ethics under a single Compliance and Corporate Ethics Framework. This framework brings together our business units and the individual subject matter specific compliance programs in a more integrated, consistent and collaborative way than we have in the past.

We have continued our comprehensive program based approach to compliance. This has been fundamental to our approach to compliance for many years and this continues to be a key element of our compliance framework with subject matter experts helping us to understand our many legal and regulatory obligations and responsibilities and translate them into practice. The programs include health, safety and environment, equal employment opportunity, privacy, trade practices and industry regulation.

This program based approach at a corporate level is supported by a newly established network of senior personnel appointed to the role of Business Unit Compliance Manager. These Compliance Managers are supported by other personnel at the business unit level with specific responsibility for the implementation of the compliance programs within their business unit. This structure has been designed with the aim of ensuring that each business unit's operations are conducted in accordance with our obligations in an efficient, effective and integrated manner. We seek to achieve this through a focus on policies, procedures, work instructions and controls that is intended to ensure that our actions, and those of our employees, are in accordance with these requirements.

A number of programs, including the privacy compliance program, are subject to periodic, independent external audits which are intended to:

• ensure that our approach is comprehensive, robust and rigorous; and

• to provide an objective view of area for further improvement.

61



Corporate Social Responsibility

At Telstra our corporate social responsibility vision is to connect with our people, customers, communities and suppliers in an accessible, healthy and environmentally sound way. Telstra is proud of its record supporting the community. Further information regarding corporate social responsibility can be found in the ‘Corporate Social Responsibility’.

Political and Other Donations

We do not make political donations. However, in line with other major publicly listed companies, we do pay fees to attend events organised by political parties where those events allow for discussion on major policy issues with key opinion leaders and policy makers.

We make donations and contribute funds to community and other organisations as part of our approach to corporate social responsibility.

Shareholder Communications Strategy

We have implemented a number of initiatives to promote effective communication with our shareholders. These include:

• maintaining an investor relations website and introducing an alternate website – nowwearetalking.com. nowwearetalking is designed to provide shareholders and other interested parties with information about the digital revolution and how it can improve our quality of life in the 21st century. nowwearetalking is also designed to increase the level of public dialogue about the future of telecommunications in Australia;

• communicating directly with shareholders twice a year through our half-year and annual review;

• placing all announcements made to the market, including transcripts of investor and media briefings, and related information on our website;

• webcasting certain events such as briefings and our annual general meeting;

• using electronic communications to advise investors, who have provided us with their email address, of significant matters that may be of interest to them; and

• writing directly to our shareholders on issues that affect their investment. For example, when we announced the transformation strategy in November 2005 we followed this up with a letter to shareholders from the CEO and a six page brochure explaining what the transformation strategy would deliver for our shareholders.

We are also seeking to encourage our shareholders to receive their communications from us electronically through our participation in the eTree program, of which we are a foundation member. Through the eTree program, we currently donate to Landcare Australia:

• $2 for every shareholder who chooses to receive all of their communications from us electronically; and

• $1 for those shareholders who choose just to receive electronic shareholder reports and notices of meetings from us.

During fiscal 2006, we donated over $56,000 to Landcare Australia through this initiative.

62



Compliance with NYSE requirementsThe NYSE has corporate governance requirements for companies listed on the NYSE. The NYSE has granted foreign private issuers such as Telstra a “home country” exemption from most of these requirements. We are, however, required to provide a brief description of the material differences between our corporate governance practices and the NYSE corporate governance requirements. These differences are described below.

Corporate Governance Committee

Under the NYSE listing rules, each listed company must have a nominating/corporate governance committee with a written charter that requires the committee to, among other matters, develop and recommend to the board of directors a set of corporate governance principles applicable to the company. We have determined that this function is best served by the Board of directors as a whole supported by our Audit Committee, rather than our Nomination or Remuneration Committees. Accordingly, our Nomination and Remuneration Committees’ charters do not require the Committees to perform this function.

Equity Compensation Plans

Under the NYSE listing rules, each listed company must give its shareholders the opportunity to vote on the adoption of, or material revisions to, equity compensation plans. Under the ASX Listing Rules, shareholders are only provided with the opportunity to vote on new equity compensation plans or material revisions to existing equity compensation plans in limited circumstances, including an issue of shares under an employee incentive scheme to a director. In accordance with the home country exemption, we only seek shareholder approval in relation to equity compensation plans in the circumstances required under Australian law.

63




At Telstra our corporate social responsibility vision is to connect with our people, customers, communities and suppliers in an accessible, healthy and environmentally sound way. Telstra is proud of its record supporting the community.

Corporate Social Responsibility (CSR) reporting is managed by the Community Investment Team in the Public Policy and Communications business unit. However, all parts of the business have accountability for their own CSR activities.

This year, we participated in the third Business in the Community Corporate Responsibility Index, overseen in Australia by the St James Ethics Centre. We again scored higher than the average score achieved by the 29 companies participating. The Corporate Responsibility Index is a tool which assists Telstra to benchmark our performance in relation to CSR and identify both areas where we are doing well, and where we can implement action to improve our performance. We also regularly participate in the FTSE4Good and a number of ethical investment surveys and indices.

Our activity over the year included:

The community

Telstra supported communities affected by natural disasters, such as cyclones Larry and Monica, the Katherine floods and a range of bushfires across Australia in January 2006. Our support efforts were aimed at helping people in affected areas maintain access to communications, and have contact with family and friends to advise them of their circumstances. Support included relief packages for affected customers consisting of:

• free call diversion from a fixed service to a fixed or mobile service of the customers’ choice, regardless of carrier;

• Telstra mobile customers who report the loss of their Telstra fixed service due to these natural disasters will be charged at fixed line rates, in accordance with their selected HomeLine plan, for local and STD calls made on their mobile service;

• a one-off $50 credit for Telstra mobile customers who do not have a fixed line and whose homes have been destroyed by bushfires; and

• the suspension and reconnection at no cost of one fixed home phone and BigPond® service per household, where homes were destroyed by the disaster.

Additional assistance varied according to the nature and impact of the event and included the distribution of pre-paid mobiles and phone cards to community agencies that were assisting in affected areas.

Telstra also provided assistance for customers who were affected by the Bali explosions in October 2005, the London explosions in July 2005 and the Pakistan earthquake in October 2005 including:

• rebating calls from Telstra fixed and mobile services to check on the well being of family members in the affected areas;

• rebating of mobile calls for Telstra customers who were travelling in the affected areas to advise relatives in Australia of their circumstances; and

• the rebate of calls for one month for Telstra customers or their family members who were hospitalised as a result of the events.

Telstra Friends, our volunteer network, donated more than 11,100 volunteer hours at 162 community events and raised in excess of $84,000 for charities. This year Telstra Friends undertook a major project in cooperation with the Australian Red Cross Blood Service to encourage staff to donate blood and increase awareness of the need for regular blood donations. On 19 October, 2005 on Telstra’s ‘Blood for Life Day’ more

64



than 2000 Telstra staff donated blood on the one day at Red Cross blood banks nationally. Telstra Friends also continued to support the sponsorship commitment with Telstra Child Flight helicopter retrieval service by creating fundraising events and providing volunteer support that helped to raise over $37,000 to assist the service this year.

Now in its fifth year, the Telstra Foundation continues to support Australian children and young people to reach their potential and build stronger and more cohesive communities. Through the Foundation’s Community Development Fund and the Telstra’s Kids Fund, we supported 738 community projects and provided grants to the value of $4.275 million.

Workplace

Telstra has focused on enabling women to reach their full potential by identifying opportunities to move into senior management positions and providing support for women returning from maternity leave. Telstra has assisted women move into non-traditional roles through various pre-employment and career development programs both internally and externally.

The overall representation rate for women in senior management has improved from 21.1% in fiscal 2005 to 23.71% in fiscal 2006.

Telstra employees celebrated International Women’s Day through a series of Women Speaker Forums across the nation. Telstra also holds Foundation Partner member status with the Serious Women’s Business Conference and sent a host of high potential female employees to the conference in 2005.

Telstra celebrated National Aboriginal and Islander Day of Celebration (NAIDOC) Week 2005 with a range of corporate and business-unit level activities. Telstra also hosted lunches and morning teas for local indigenous communities such as the Thornbury Primary School in Melbourne, Victoria.

Telstra is committed to providing a flexible workplace which focuses on employee well being and work life balance. Results are achieved through initiatives such as part time work and job share guidelines, and Telstra’s commitment to health and well being programs such as Skin Cancer Awareness Week and Healthy Heart Week.

Marketplace

This year, Telstra provided over $200 million in benefits to low-income Australians through a range of concessions and products and services, available through the Access for Everyone package.

A 2005 survey showed high satisfaction among the users of the products and services provided through this package. In January 2006 Telstra launched an additional program in the package, the Telstra Phonecard Assistance Program, through which Telstra will provide community agencies with up to $1 million of Phonecards per annum to assist clients who rely on Telstra public payphones for their communications needs.

In July 2005 Telstra released a Big-Button/Multipurpose phone through our Disability Equipment Program. The features of the new phone help our customers who have difficulty reading or dialling numbers on their phone, holding a phone handset, hearing or making themselves heard on the phone or getting to the phone in time to answer it. It is one example of Telstra’s extensive range of products and services available to eligible customers through our Disability Equipment Program at no additional cost to their standard monthly phone rental. See our website www.telstra.com.au/disability/catalogue/equipment.htm for more information.

65


Shareholder Information

Shareholder InformationListing InformationMarkets in which our shares are traded

We are listed, and those of our shares that are not held by the Commonwealth are quoted, on the Australian Stock Exchange (ASX) and on the New Zealand Stock Exchange (NZX). American Depositary Shares (ADSs), each representing five shares, have been issued by the Depositary and are listed on the New York Stock Exchange (NYSE).

In December 2005, the US Securities and Exchange Commission (SEC) proposed rules that, if adopted, would make it easier for foreign companies to terminate their SEC registration. If the SEC’s proposed deregistration rules are adopted, we intend to deregister from the SEC ongoing reporting obligations and to delist our ADRs from the NYSE at the earliest opportunity, which may be accomplished by the end of this calendar year.

Our securities were initially listed on 17 November 1997. This followed the sale by the Commonwealth of 33.3% of its shares in the Company. Subsequently on 18 October 1999, the Commonwealth sold an additional 16.6% of the shares in the Company.

Markets on which our debt securities are listed

We also have debt securities listed on the ASX, the London Stock Exchange, the Paris Stock Exchange and the Swiss Stock Exchange.

Distribution of shares and shareholdingsThe following table shows the number of unlisted and listed shares on issue at 1 September 2006. The table also shows, as a group, the shareholdings of our directors and officers:

There were 5,997,078,863 shares issued and available for trading on the market as at 1 September 2006. This includes 211,629 shares held by the Commonwealth and listed for trading. On 1 September 2006 the number of shareholders was 1,524,532. At that date, 27,297,812 ADSs (equivalent to 136,489,060 shares) were held by 50 record holders.

Title of class Identity of person or group Amount owned % of class

Shares The Commonwealth 6,446,207,123(1) 51.8Shares Listed shareholders 5,996,867,234(1) 48.2

12,443,074,357(1) 100.0

(1) All shares held by the Commonwealth are unlisted, except for 211,629 listed shares.

66



Distribution of shares

The following table summarises the distribution of our public listed shares as at 1 September 2006:

Twenty largest shareholders as at 1 September 2006

The following table sets out the top 20 shareholders other than the Commonwealth when multiple holdings are grouped together:

Number of shareholders (1) Shares (2)

Size of holding Number % Number %

1 - 1,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 901,435 59.13 553,474,596 9.231,001 - 2,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 282,364 18.52 441,534,735 7.362,001 - 5,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 230,715 15.13 733,462,077 12.235,001 - 10,000 . . . . . . . . . . . . . . . . . . . . . . . . . 68,991 4.53 500,420,837 8.3410,001- 100,000 . . . . . . . . . . . . . . . . . . . . . . . . 39,807 2.61 856,073,764 14.27100,001 and over . . . . . . . . . . . . . . . . . . . . . . . 1,219 0.08 2,912,112,854 48.56Total 1,524,531 100 5,997,078,863 100

(1) Number of shareholders holding less than a marketable parcel of shares was 10,184 shareholders who held 885,786 shares.(2) Not including those shares held by the Commonwealth, except for 211,629 listed shares which are held by the Commonwealth.

Shareholders Numberof shares

% of issued shares (1)

1 National Nominees Limited 503,728,673 8.40%2 J P Morgan Nominees Australia Ltd 482,830,142 8.05%3 Westpac Custodian Nominees Ltd 394,323,133 6.58%4 ANZ Nominees Limited 242,189,871 4.04%5 Citicorp Nominees Pty Limited 205,576,971 3.43%6 RBC Global Services Australia Nominees Pty Ltd 117,990,972 1.97%7 Cogent Nominees Pty Limited 103,922,712 1.73%8 Telstra ESOP Trustee Pty Ltd 53,645,950 0.89%9 UBS Nominees Pty Ltd 49,303,938 0.82%10 Queensland Investment Corporation 37,914,163 0.63%11 HSBC Custody Nominees (Australia) Limited 34,732,295 0.58%12 Australian Foundation Investment Company Limited 31,928,338 0.53%13 AMP Life Limited 31,536,393 0.53%14 Australian Reward Investment Alliance 29,169,224 0.49%15 Merrill Lynch (Australia) Nominees Pty Ltd 22,700,965 0.38%16 Dervat Nominees Pty Limited 19,322,000 0.32%17 Argo Investments Limited 19,204,800 0.32%18 Telstra Growthshare Pty Ltd 19,079,654 0.32%19 Westpac Financial Services Ltd 17,239,314 0.29%20 Questor Financial Services Limited 13,851,999 0.23%

Total 2,430,191,507 40.53%(1) Not including those shares held by the Commonwealth

67



Substantial shareholders

As at 1 September 2006, other than the Commonwealth of Australia, we did not have any substantial share-holders.

Voting rights

Shareholders (whether residents or non-residents of Australia) may vote at a meeting of shareholders in person, by proxy, attorney, or representative, depending on whether the shareholder is an individual or a company.

Subject to any rights or restrictions attaching to our shares, on a show of hands each shareholder present in person or by proxy, attorney or representative has one vote and on a poll, has one vote for each fully paid share held. Presently, we have only one class of fully paid ordinary shares and these do not have any voting restrictions. If shares are not fully paid, the number of votes attaching to the shares is pro-rated accordingly. The Commonwealth has equal voting rights with all other shareholders.

68


(This page has been left blank intentionally)

69


Directors’ report

Directors’ report

In accordance with a resolution of the Board, the directors present their report on the consolidated entity (Telstra Group) consisting of Telstra Corporation Limited and the entities it controlled at the end of or during the year ended 30 June 2006.

This is our first full year financial report prepared in accordance with Australian equivalents to International Financial Reporting Standards (A-IFRS). When preparing this directors’ report, we have amended certain accounting and valuation methods applied under the previous Australian Generally Accepted Accounting Principles (AGAAP) to comply with A-IFRS. With the exception of financial instruments, the comparative figures have been restated to reflect these adjustments.

This year has seen the commencement of a 3 to 5 year transformation of the company to improve long term shareholder value. The financial performance of the Company in fiscal 2006 was impacted by the investment in this transformation and provision for future restructuring.

Principal activity

Telstra’s principal activity during the financial year was to provide telecommunications and information services for domestic and international customers. There has been no significant change in the nature of this activity during the year.

Results of operations

Telstra’s profit for the year was $3,181 million (2005: $4,309 million). This result was after deducting:

• net finance costs of $936 million (2005: $880 million); and

• income tax expense of $1,380 million (2005: $1,746 million).

Earnings before interest and income tax expense was $5,497 million, representing a decrease of $1,438 million or 20.7% on the prior year’s result of $6,935 million. This decrease was due to higher labour costs, in particular redundancy costs, higher goods and services purchased and increases in other expenses supporting revenue growth. Expenses were also impacted by the recognition of transformation related expenses, including a provision at year end for redundancy and restructuring costs of $427 million to be incurred as part of our business transformation.

Review of operations

Financial performance

Our total income (excluding finance income) increased by $658 million or 2.9% to $23,100 million, reflecting a rise in total revenue (excluding finance income) of $591 million or 2.7% and other income by $67 million or 25.7%.

Total income (excluding finance income) growth was mainly attributable to:

• mobile goods and services - $284 million or 6.1%;

• Internet and IP solutions revenue - $530 million or 38.5%;

• advertising and directories revenue - $126 million or 7.9%; and

• pay TV bundling - $57 million or 21.7%.

Mobile goods and services revenue increased largely due to increases in mobile data, international roaming and mobile interconnection revenues. Our interconnection revenues increased primarily due to Hutchison 3G† roaming services, which commenced in April 2005. In addition, we continued to experience growth in the number of mobiles in operation of 261,000 to reach a total of 8.5 million, as well as increased revenue from

70


Directors’ report

mobile handset sales. 3G services were launched and take up has been very promising. Data usage is particularly strong by 3G users.

The increase in Internet and IP solutions revenue was due to the significant growth in the number of subscribers to our BigPond® broadband product. During fiscal 2006 we increased the number of broadband subscribers by 1.2 million to 2.9 million, reflecting wholesale subscribers of 1.4 million and retail subscribers of 1.5 million.

Our advertising and directories revenue increased compared with the prior year due to the continued strong performance of our Yellow pages® and White pages® print directories and strong growth in online products. This growth has also been driven by innovative marketing and product development strategies.

Pay TV bundling revenue increased due to new subscribers and current subscribers migrating to the FOXTEL Digital‡ premium product as a result of promotions during the year, offering minimal price installation and discounted packages.

Partially offsetting the revenue growth was a decline in PSTN product revenues of $540 million or 6.7% as the market continues to move towards new products and services. There has been a general reduction in PSTN volumes during the year with a decline in retail basic access lines and volume reductions across local calls, national long distance calls, international direct calls and fixed interconnection. Yields have also declined due to competitive pricing pressure and continuing customer migration to other products. The rate of decline in the second half of the year has reduced.

Total operating expenses (before depreciation and amortisation, finance costs and income tax expense) increased by $1,637 million or 13.8% compared with the prior year. This growth was mainly attributable to:

• labour - $506 million or 13.1%;

• goods and services purchased - $519 million or 12.3%; and

• other expenses - $612 million or 16.0%.

Excluding the effects of our transformation costs, our total operating expenses (before depreciation and amortisation, finance costs and income tax expense) increased by $933 million or 7.9%. Further details of the increase in expenses is discussed below.

Labour costs grew in fiscal 2006 mainly due to the following:

• an increase in redundancy expense due to transformation initiatives;

• annual salary increases due to enterprise agreements and annual salary reviews; and

• an increase in labour expense of controlled entities as a result of entities acquired during fiscal 2005 being included for the full year in fiscal 2006.

Goods and services purchased increased due to the following:

• an increase in network payments as a result of a rise in the number of terminations on other networks and additional network access charges incurred as a result of our 3G partnership activities;

• higher handset subsidies from an increase in the take up of subsidised plans;

• a rise in purchases of pay TV services to enable us to provide bundled products to meet market demand; and

• increased costs associated with our restructuring provision.

71


Directors’ report

Other expenses grew due to the following:

• recognition of a restructuring provision associated with our property rationalisation, cancellation of server leases and decommissioning of certain information technology platforms;

• increased maintenance costs of the existing 3G network and the operational expenditure relating to the construction of the new 3GSM 850 network; and

• increased costs associated with our transformation initiatives, including higher consultancy costs for transformation activities and additional market research as part of our market based management approach.

Depreciation and amortisation costs grew to $4,087 million or by 15.8% in fiscal 2006 primarily due to the reassessment of service lives of our assets as part of the transformation strategy. As a result, we have accelerated depreciation and amortisation on our CDMA network, switching systems, certain business and operational support systems and related software totalling $422 million for the year.

Partially offsetting the growth in other expenses was a reduction in our bad and doubtful debt expense resulting from improved credit management performance that led to lower debtor provision requirements and write offs, as well as reduced payments to external debt collection agents.

Net finance costs increased by $56 million or 6.4% in fiscal 2006, primarily due to higher levels of debts driven by the cash requirements to fund the payment of our dividends and capital expenditure associated with the improvement of our core infrastructure. Our borrowings have also been affected by a higher effective interest rate as a result of refinancing elements of our maturing debt. The net debt gearing level remains within the financial parameters set by the Board.

Income tax expense decreased by $366 million or 20.9% to $1,380 million in fiscal 2006 mainly as a result of the lower profit. The effective tax rate in the current year was 30.3% compared with the prior year rate of 28.8%. The effective tax rate is consistent with the Commonwealth statutory marginal income tax corporate rate of 30.0%. The effective tax rate has increased from the prior year mainly due to reduced differences for partnership losses and an increase in the under provision for tax from prior periods.

Financial condition

We continued to maintain a strong financial position, as demonstrated by us generating free cash flow of $4,550 million. During fiscal 2006 we continued to develop our core infrastructure network and re-energise our Company through ongoing operational transformation. In addition, we acquired a number of strategic investments and paid a total of $4,970 million to shareholders as dividends in fiscal 2006.

As part of our ongoing operational transformation, we have introduced the one factory methology to consolidate and simplify the way we operate at all levels of the business. Previously, we had invested in multiple platforms in our exisiting networks. We intend on using economies of scale to ensure rationalisation of the number of operational platforms. We are currently implementing new business support systems and operational support systems to deliver simplificiation of our current processes and new capababilities cost effectively.

During fiscal 2006, we merged our 100% owned Hong Kong mobile operations (Telstra CSL Group) with the Hong Kong mobile operations of New World PCS Holdings Limited and its controlled entities (New World Mobility Group) to form the CSL New World Mobility Group. Under the merger agreement, Telstra CSL Limited (Telstra CSL) issued new shares to New World Mobility Holdings Limited in return for 100% of the issued capital of the New World Mobility Group and $42 million in net proceeds. The share issue diluted Telstra’s ownership in the merged group to 76.4%.

72


Directors’ report

This merger was undertaken as the two entities undertake complementary services in providing mobile telecommunication products and services in Hong Kong. We believe the CSL New World Mobility Group will be able to leverage their strong brand recognition and common network. The merged entity will also create the largest wireless service provider in the Hong Kong market.

During fiscal 2006, our credit rating outlook was adjusted by Standard and Poors, and Moodys. The change was initiated as a result of the uncertain environment in which we are operating, reflected by the regulatory uncertainty and the speculation surrounding the further sale of shares in our Company. As a result, our current credit ratings are as follows:

Our financial condition has enabled us to execute partially our announced capital management program. During fiscal 2006, we returned $4,970 million to shareholders as ordinary and special dividend payments. In fiscal 2006, we paid two special dividends of 6 cents per share ($1,492 million) with our final dividend and interim dividend. We announced during the year that the third year of the capital management policy would not occur. Refer to the strategy section below for further details.

We reported a strong free cash flow position, which enabled the company to pay increased dividends and fund the acquisition of a number of new entities. We continue to source cash through ongoing operating activities and through careful capital and cash management.

Our cash flow before financing activities (free cash flow) position remains strong despite declining to $4,550 million in the year from $5,194 million in the prior year. This decline was driven by higher levels of cash used in investing activities as we undertake our network and information technology platform transformation and a decline in operating performance.

Cash used in investing activities was $4,012 million, representing an increase of $246 million over the prior year. The increase is mainly attributable to capital expenditure to upgrade our telecommunications networks, eliminate components that are no longer useful and improve the systems used to operate our networks. Our investing expenditure also includes $312 million of deferred payments in relation to our purchase of the 3G radio access network assets from Hutchison Australia Pty Ltd in fiscal 2005.

Our cash used in financing activities was $5,399 million, resulting from the funding of dividend payments and the refinancing of our maturing debt, offset by net proceeds from borrowings received from a number of our private placements.

Investor return and other key ratios

Our basic earnings per share decreased to 25.7 cents per share in fiscal 2006 from 34.7 cents per share in the prior year. The decrease was due to lower profit in fiscal 2006.

We have declared a final fully franked dividend of 14 cents per ordinary share ($1,739 million), bringing declared dividends per share for fiscal 2006 to 34 cents per share. The prior year declared dividends amounted to 40 cents per share. The dividends paid in fiscal 2006 were 40 cents per share compared with dividends paid in fiscal 2005 of 33 cents per share. In addition to our dividends in fiscal 2005, we returned $750 million to shareholders through an off market share buy-back during fiscal 2005.

Long term Short term Outlook

Standard & Poor’s A A1 negative

Moody’s A2 P1 negative

Fitch A+ F1 negative

73


Directors’ report

Other relevant measures of return include the following:

• Return on average assets - 2006: 15.8% (2005: 20.6%)

• Return on average equity - 2006: 24.2% (2005: 30.6%)

The return on both average assets and average equity is lower in fiscal 2006 primarily due to lower profit as previously discussed.

Strategy

We are Australia’s largest telecommunications and information services company. We offer a full range of telecommunication products and services throughout Australia and various telecommunication services in certain overseas countries.

During fiscal 2006, we announced our new strategic and operational focus to continually move forward as an Australian market leader in the telecommunications industry. This review was a blueprint for improving our long term performance by providing a solid platform to drive future growth and create operational efficiencies.

Our vision is to streamline our processes to provide solutions that are simple and valued by our customers, which we believe will ultimately lead to the creation of long term value for our shareholders. Our strategy involves:

• providing customers with integrated telecommunication services;

• investing in systems and processes to remove complexity and cost from the business;

• continually improving our operating performance in mobiles and broadband, as well as accelerating opportunities in Sensis;

• investing in new services and applications to differentiate us from our competitors; and

• targeted investing in areas where we can create value for our shareholders.

We intend to deliver our new strategy through the implementation of a one factory approach and market based management. The one factory approach involves bringing together the operations and management of our internal IT systems, removing duplication and complexity in our systems and implementing simpler and efficient processes and systems, which we believe will improve our operational efficiency and cost structure. Market based management involves us obtaining a better understanding of each of our respective customers’ unique segment needs, priorities and expectations. It is based on extensive market research, which we will utilise to ensure our processes and procedures meet our various customer requirements to ultimately provide them with better services.

In addition, we currently face a series of business operating issues that we expect will impact our future results. These issues range from regulatory issues, including unconditioned local loop access pricing and operational separation, to the potential full sale of the Company.

We are currently in the process of rebuilding, redirecting and transforming the Company. The next three to five years will see us concentrate on rebuilding the network, redirecting resources into next generation services, reshaping the business and segmentation of customers according to their needs. By streamlining our operations, while better satisfying the needs of our customers, we believe we can deliver the financial performance improvements expected by our shareholders.

Although the transformation of our Company is at an early stage, current progress is encouraging. Our transformation has already resulted in our national 3GSM 850 network build being more than 60% complete.

74


Directors’ report

Savings have been achieved by consolidating office space, vacating existing leases and sourcing mobile devices through global supply-chain specialist, Brightstar. In addition, we have slowed the PSTN revenue decline in the second half of the year and increased the number of customers using three or more Telstra products. At the same time, we have significantly reduced our customers’ unsatisfied demand for ADSL broadband.

Our Fibre to the Node (FTTN) project is on hold, however we have devoted substantial time and resources in discussions with the ACCC to achieve regulation reform, including safeguards for shareholder investments. Until our actual costs are recognised and the ACCC’s regulatory practices change, we will not invest in a FTTN broadband network.

We believe that the successful transformation of our Company will achieve the following:

• simplified and integrated experience for our customers;

• Telstra BigPond® to be Australia’s leading ISP and services entity;

• Sensis to be Australia’s leading information resource;

• our Company to have the leading wireless network with faster speeds and best in-building coverage, as well as Australia’s largest IP network, providing customers with integrated telecommunications services; and

• operational and cost efficiencies.

During fiscal 2006, we revised our capital management policy to not make the last payment of a special dividend. No decision with respect to the payment or funding of future ordinary dividends has been made. The Board will make these decisions in the normal cycle having regard to, among other factors, the Company’s earnings and cash flow, as well as regulatory decisions.

Industry dynamics

The Australian telecommunications industry is continually changing. We have seen the number of mobile handsets in the Australian market continue to grow, as well as the use of mobile services. Most households continue to maintain a basic access line, however PSTN products are increasingly being substituted by wireless products.

Advances in technology continue to transform the telecommunications industry. In recent years, we have seen various new product offerings released to the market, including the provision of high-speed wireless services, 3G mobile services. Voice services over IP (VoIP) is another area of change for which the industry is preparing. We have successfully commissioned and commenced testing our next generation VoIP platform which we believe will offer value added broadband services to our customers in the future. We expect take up of this product to increase in future reporting periods, as the market becomes more aware of its performance capabilities.

We aim to be at the forefront of providing leading edge telecommunication services to meet the demands of our customers. During fiscal 2006, we proposed the roll out of the new 3GSM 850 network. In addition to current services already experienced on existing networks, we believe future 3GSM 850 customers will enjoy many enhanced features, such as improved video calling services and faster broadband access speeds, in addition to better in-building coverage.

The broadband sector is in a significant growth phase as the demand for high speed Internet access accelerates. We have recently seen large increases in broadband subscribers and a steady fall in prices as providers compete for market share. We expect the broadband sector to continue its expansion through the provision of new innovative products.

75


Directors’ report

As telecommunications, computing and media technologies continue to converge, we are focused on enhancing our capabilities to provide new and innovative application and content services and to expand further into these converging markets. The challenge for telecommunications companies moving forward will be to continue maximising revenues from higher margin traditional products such as PSTN products, while managing the shift in customer demand to lower margin emerging products such as broadband. Overall operating margins are under constant pressure from the product mix change to lower margin products. However, as we build a software based cost efficient infrastructure, new products, applications and content can be delivered at low incremental costs to again provide good margins.

We continue to be at the forefront of these, and other technology advancements as we continue to devote substantial capital to upgrading and simplifying our telecommunications networks to meet customer demand, particularly for the new product and growth areas. We believe we are well positioned to focus on these areas of new customer demand by providing a broad range of innovative products with creative and competitive pricing structures.

Sale of the Commonwealth’s remaining interest in Telstra

The Commonwealth Government has passed legislation to enable the sale of its remaining interest in Telstra. The Government has stated that it is yet to decide about proceeding with a sale. This decision will include an assessment of whether the level of demand for the shares would allow a partial or full sale of the Commonwealth's remaining interest. Until this decision is made by the Government and announced, it is unclear how this may affect our capital structure, operations and corporate compliance obligations. Any sale by the Commonwealth of its remaining interest will require our management’s time and resources.

Dividends

The directors have declared a fully franked final dividend of 14 cents per share ($1,739 million). The dividends will be franked at a tax rate of 30%. The record date for the final dividend will be 25 August 2006 with payment being made on 22 September 2006. Shares will trade excluding entitlement to the dividend on 21 August 2006.

During fiscal 2006, the following dividends were paid:

At present, it is expected that we will be able to fully frank declared dividends out of fiscal 2007 earnings. However, the directors can give no assurance as to the future level of dividends, or of the franking of these dividends. This is because our ability to frank dividends depends upon, among other factors, our earnings, Government legislation and our tax position.

Dividend Date declared Date paid Dividend per share Total dividend

Final dividend for the year ended 30 June 2005 11 August 2005 31 October 2005 14 cents franked to 100% $1,739 million

Special dividend for the year ended30 June 2005 11 August 2005 31 October 2005 6 cents franked to 100% $746 million

Interim dividend for the year ended 30 June 2006 8 February 2006 24 March 2006 14 cents franked to 100% $1,739 million

Special dividend for the year ended 30 June 2006 8 February 2006 24 March 2006 6 cents franked to 100% $746 million

76


Directors’ report

Significant changes in the state of affairs

There have been no significant changes in the state of affairs of our Company during the financial year ended 30 June 2006, except for:

• we announced our new strategic and operational focus to continually move forward as an Australian market leader in the telecommunications industry. As part of this strategic review, we unveiled a blueprint for improving our long term performance; and

• we are involved in continuing discussions over the future regulatory environment impacting the Australian telecommunications industry in general and us in particular. The regulatory environment we operate in has a significant impact on our future performance. There are several key regulatory decisions, whether recently made or pending, which will shape the future of our Company. We are currently in discussions with the regulators, which we hope will advance the best interests of our shareholders, customers and the nation.

Likely developments and prospects

The directors believe, on reasonable grounds, that Telstra would be likely to be unreasonably prejudiced if the directors were to provide more information than there is in this report or the financial report about:

• the likely developments and future prospects of Telstra’s operations; or

• the expected results of those operations in the future.

Events occurring after the end of the financial year

The directors are not aware of any matter or circumstance that has arisen since the end of the financial year that, in their opinion, has significantly affected or may significantly affect in future years Telstra’s operations, the results of those operations or the state of Telstra’s affairs; other than:

• on 31 July 2006, our 50% owned pay television joint venture FOXTEL‡ entered into a new $600 million syndicated secured term loan facility to fund the refinancing of previous loan facilities (including the $550 million syndicated facility), and to enable it to meet future cash flow and expenditure requirements.

The equity contribution deed (ECD) entered into by us and FOXTEL’s‡ other ultimate shareholders, News Corporation Limited and Publishing and Broadcasting Limited has been terminated. Under this arrangement, recourse to our controlled entity Telstra Media Pty Ltd, as a FOXTEL‡ partner, is limited to the assets of the FOXTEL‡ Partnerships.

Details about directors and executives

Changes to the directors of Telstra Corporation Limited during the financial year and up to the date of this report were:

• John E Fletcher resigned as director on 30 June 2006;

• Peter J Willcox was appointed as director on 17 May 2006;

• John D Zeglis was appointed director on 17 May 2006;

• John T Ralph retired as director on 11 August 2005;

• Anthony J Clark retired as director on 11 August 2005;

• Solomon D Trujillo was appointed CEO and executive director on 1 July 2005; and

• Zygmunt E Switkowski resigned as CEO and executive director on 1 July 2005.

77


Directors’ report

Information about directors and senior executives is provided as follows and forms part of this report:

• names of directors and details of their qualifications, experience, special responsibilities and directorships of other listed companies are given on pages 81 to 86;

• number of Board and Committee meetings and attendance by directors at these meetings is provided on page 87;

• details of director and senior executive shareholdings in Telstra are shown on page 88; and

• details of director and senior executive remuneration is detailed in the remuneration report on pages 105 to 106.

Company secretary

The qualifications, experience and responsibilities of our company secretary are provided on page 86 and forms part of this report.

Directors’ and officers’ indemnity

Constitution

Our constitution provides for us to indemnify each officer to the maximum extent permitted by law for any liability incurred as an officer provided that:

• the liability is not owed to us or a related body corporate;

• the liability is not for a pecuniary penalty or compensation order made by a Court under the Corporations Act 2001; and

• the liability does not arise out of conduct involving a lack of good faith.

Our constitution also provides for us to indemnify each officer, to the maximum extent permitted by law, for legal costs and expenses incurred in defending civil or criminal proceedings.

If one of our officers or employees is asked by us to be a director or alternate director of a company which is not related to us, our constitution provides for us to indemnify the officer or employee out of our property for any liability he or she incurs. This indemnity only applies if the liability was incurred in the officer’s or employee’s capacity as a director of that other company. It is also subject to any corporate policy made by our CEO. Our constitution also allows us to indemnify employees and outside officers in some circumstances. The terms “officer”, “employee” and “outside officer” are defined in our constitution.

Deeds of indemnity in favour of directors, officers and employees

Telstra has also executed deeds of indemnity in favour of:

• directors of the Telstra entity (including past directors);

• secretaries and executive officers of the Telstra entity (other than Telstra entity directors) and directors, secretaries and executive officers of our wholly owned subsidiaries;

• directors, secretaries and executive officers of a related body corporate of the Telstra entity (other than a wholly owned subsidiary) while the director, secretary or executive officer was also an employee of the Telstra entity or a director or employee of a wholly owned subsidiary of the Telstra entity (other than Telstra entity directors); and

• employees of Telstra appointed to the boards of other companies as our nominees.

78


Directors’ report

Each of these deeds provides an indemnity on substantially the same terms as the indemnity provided in the constitution in favour of officers. The indemnity in favour of directors also gives directors a right of access to Board papers and requires Telstra to maintain insurance cover for the directors.

Additionally, Telstra has executed an indemnity in favour of employees (including executive officers other than directors) in respect of liabilities incurred in the formulation, entering into or carrying out, of a Telstra Sale Scheme (as defined in the Telstra Corporation Act 1991 (Cwth)). This indemnity would cover liabilities incurred by an employee in connection with the proposed sale by the Commonwealth of its remaining shareholding in Telstra. The indemnity is subject to an exclusion for liabilities arising out of conduct involving a lack of good faith.

In April 2006, the Commonwealth Government executed a Deed of Indemnity in favour of the directors of Telstra to cover liabilities incurred by those directors in connection with a Telstra Sale Scheme (as defined in the Telstra Corporation Act 1991 (Cwth)). This indemnity is subject to certain limited exclusions described in the Deed. The Commonwealth also executed a similar indemnity in favour of “Telstra Executives” (as defined in the Deed). The class of “Telstra Executives” includes persons who are likely to be involved in enabling Telstra to assist the Commonwealth in relation to a Telstra Sale Scheme.

Directors’ and officers’ insurance

Telstra maintains a directors’ and officers’ insurance policy that, subject to some exceptions, provides worldwide insurance cover to past, present or future directors, secretaries or executive officers of the Telstra entity and its subsidiaries. Telstra has paid the premium for the policy. The directors’ and officers’ insurance policy prohibits disclosure of the premium payable under the policy and the nature of the liabilities insured.

Environmental regulation and performance

Telstra’s operations are subject to some significant environmental regulation under Commonwealth, State and Territory law, particularly with regard to:

• the impact of the rollout of telecommunications infrastructure;

• site contamination; and

• waste management.

Telstra has established procedures to monitor and manage compliance with existing environmental regulations and new regulations as they come into force.

The directors are not aware of any significant breaches of environmental regulation during the financial year.

Audit and non-audit services

The Auditor-General and Ernst & Young are authorised to perform all audit services, including an examination or review of the financial statements of the Company in accordance with the laws and rules of each jurisdiction in which filings are made for the purpose of expressing an opinion on such statements.

The Audit Committee approves the provision of recurring audit services as part of the annual approval of the audit plan. Additional audit and non-audit services are pre-approved by the Audit Committee provided they fall within a defined list of services specified by the Audit Committee. Those additional audit and non-audit services that are not listed have to be specifically approved by the Audit Committee prior to the commencement of any engagement. In addition, all non-audit services with a value over $100,000 must be separately approved by the Audit Committee, even if the service is listed as a pre-approved service.

79


Directors’ report

The Auditor-General does not provide non-audit services. Ernst & Young does provide non-audit services, but are specifically prohibited from performing any of the following services:

• bookkeeping services and other services related to preparing Telstra’s accounting records of financial statements;

• financial information system design and implementation services;

• appraisal or valuation services, fairness opinions, or contribution in kind reports;

• actuarial services;

• internal audit services;

• management function or human resources;

• broker or dealer, investment adviser, or investment banking services;

• taxation advice of a strategic or tax planning nature; and

• legal services or expert services unrelated to the audit.

In addition, Ernst & Young may only provide non-audit services if the performance of the non-audit service will not cause the total annual revenue to Ernst & Young from non-audit work to exceed the aggregate annual amount of Ernst & Young’s audit fees. The Audit Committee will not approve the provision of a non-audit service by Ernst & Young if the provision of the service would compromise Ernst & Young’s independence.

The provision of non-audit services by Ernst & Young is monitored by the Audit Committee via bi-annual reports to the Audit Committee. In addition, where engagements involve services from the defined list of services, these are reported to the Audit Committee at the following meeting.

The Audit Committee expects the Auditor-General and requires Ernst & Young to submit annually to the Audit Committee a formal written report delineating all relationships between the Auditor-General, Ernst & Young and the Telstra Group. This includes:

• a listing of all audit and non-audit fees billed by the Auditor-General and Ernst & Young in the most recent fiscal year;

• a statement on whether the Auditor-General and Ernst & Young are satisfied that the provision of the audit and any non-audit services is compatible with auditor independence; and

• a statement regarding the Auditor General’s and Ernst & Young’s internal quality control procedures.

A copy of the independence of the auditor declaration is set out on page 89 and forms part of this report.

The Audit Committee submits annually to the Board a formal written report detailing the nature and amount of any non-audit services rendered by Ernst & Young during the most recent fiscal year and an explanation of why the provision of these non-audit services is compatible with auditor independence. If applicable, the Audit Committee recommends that the Board take appropriate action in response to the Audit Committee’s report to satisfy itself of Ernst & Young’s independence.

Details of amounts paid or payable to the auditor for non-audit services provided during the year are located in note 8 to our financial statements.

For the reason set out above, the directors are satisfied that the provision of non-audit services by the external auditor during the year ended 30 June 2006 is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001.

80


Directors’ report

Rounding of amounts

The Telstra entity is a company of the kind referred to in the Australian Securities and Investments Commission class order 98/100, dated 10 July 1998 and issued pursuant to section 341(1) of the Corporations Act 2001. As a result, amounts in this report and the accompanying financial report have been rounded to the nearest million dollars, except where otherwise indicated.

This report is made in accordance with a resolution of the directors.

Donald McGauchieChairman10 August 2006

Solomon D TrujilloChief Executive Officer and Executive Director10 August 2006

81


Directors’ report

Directors’ profiles

As at 10 August 2006, our directors were as follows:

(1) Other than the CEO, one third of directors are subject to re-election by rotation each year.(2) Solomon D Trujillo was appointed CEO and executive director on 1 July 2005.(3) In accordance with our constitution, Peter Willcox and John Zeglis have been appointed to fill interim positions and will stand for election

at the 2006 annual general meeting.

A brief biography for each of the directors as at 10 August 2006 is presented below:

Donald G McGauchie AOAge 56Chairman

Mr McGauchie joined Telstra as a non-executive director in September 1998 and was appointed as chairman in July 2004. He is chairman of the Nomination Committee and is a member of the Remuneration Committee.

Experience:

Mr McGauchie has wide commercial experience within the food processing, commodity trading, finance and telecommunication sectors. He also has extensive public policy experience, having previously held several high-level advisory positions to the government including the Prime Minister’s Supermarket to Asia Council, the Foreign Affairs Council and the Trade Policy Advisory Council.

Directorships of other listed companies - current:

Director, James Hardie Industries NV (2003- ) and Nufarm Limited (2003- ).

Directorships of listed companies - past three years:

Deputy chairman, Ridley Corporation Limited (1998-2004); director, National Foods Limited (2000-2005) and Graincorp Limited (1999-2003).

Other:

Current: director, Reserve Bank of Australia; Partner, C&E McGauchie - Terrick West Estate.

Former: president of the National Farmers Federation (1994-1998); chairman, Rural Finance Corporation (2003-2004).

Awarded the Centenary Medal for service to Australian society through agriculture and business in 2003. Appointed an officer in the general division of the Order of Australia in 2004.

Name Age PositionYear of initial appointment

Year lastre-elected (1)

Donald G McGauchie . . . . . . . . 56 Chairman 1998 2005

Solomon D Trujillo (2) . . . . . . . . 54 CEO and executive director 2005 -

Belinda J Hutchinson. . . . . . . . 53 Director 2001 2004

Catherine B Livingstone . . . . . . 50 Director 2000 2005

Charles Macek . . . . . . . . . . . . 59 Director 2001 2004

John W Stocker . . . . . . . . . . . 61 Director 1996 2003

Peter J Willcox (3) . . . . . . . . . . 60 Director 2006 -

John D Zeglis (3) . . . . . . . . . . . 59 Director 2006 -

82


Directors’ report

Solomon D Trujillo – BSc, BBus, MBA, Hon Doctor of Law Degrees (University of Wyoming, University of Colorado) Age 54

Mr Trujillo joined Telstra as CEO on 1 July 2005.

Experience:

Mr Trujillo has spent his career in the communications sector where he managed fixed line, wireless, broadband and directory businesses and served as a leader in the shift to market-based management. He most recently served as CEO of Orange SA, one of Europe’s leading wireless companies. Mr Trujillo was chairman and CEO of US West until he retired in July 2000 after the company’s merger with Qwest Communications.


Target Corporation (1994- ).


Director, Electronic Data Systems Corporation (EDS) (2005-2005), PepsiCo Inc. (2000-2005), Orange SA (2001-2005) and Gannett Co Inc (2002-2006).

Other:

Current: member, World Economic Forum (2005- ) and UCLA’s School of Public Affairs (2000- ); trustee, Boston College; Director, Tomas Rivera Policy Institute (1991- ).

Recipient, the Ronald H. Brown Corporate Bridge Builder Award in 1999 from President Clinton for his lifetime commitment as an advocate of workplace diversity.

Belinda J Hutchinson – BEc, FCAAge 53

Ms Hutchinson joined Telstra as a non-executive director in November 2001. She has been a member of the Audit Committee since February 2005.

Experience:

Ms Hutchinson has had a long association with the banking industry and has been associated with Macquarie Bank since 1992 where she was an executive director. She was previously a vice president of Citibank Ltd.


Director, QBE Insurance Group Limited (1997- ) and Coles-Myer Ltd (2005- ).


Director, TAB Limited (1997-2004) and Crane Group Limited (1997-2004).

Other:

Current: director, St Vincent’s and Mater Health Sydney Limited (2001- ); president, Library Council of New South Wales (2005- ) (member since 1997); and consultant, Macquarie Bank Limited (1997- ).

Former: director of Energy Australia Limited (1997- 2005).

83


Directors’ report

Catherine B Livingstone – BA (Hons), FCA, FTSEAge 50

Ms Livingstone joined Telstra as non-executive director in November 2000. She is a member of the Audit Committee and the Technology Committee.

Experience:

Ms Livingstone has a degree in accounting and has held several finance and general management roles predominantly in the medical devices sector. Ms Livingstone was the chief executive of Cochlear Limited (1994-2000).


Director, Macquarie Bank Limited (2003- ).


Director, Goodman Fielder Ltd (2000-2003) and Rural Press Limited (2000-2003).

Other:

Current: chairman, CSIRO (2001- ); member, Business/Industry/Higher Education Collaboration Committee (BIHECC).

Former: chairman and director Australian Business Foundation (2000-2005);

Director, Sydney Institute (1998-2005); former member, Department of Accounting and Finance Advisory Board Macquarie University.

Charles Macek - BEc, MAdmin, FAICD, FCPA, FAIM, SF Fin, FCAAge 59

Mr Macek joined Telstra as a non-executive director in November 2001. He is a member of the Audit Committee and Nomination Committee and is chairman of the Remuneration Committee.

Experience:

Mr Macek has a strong background in economics and has had a long association with the finance and investment industry. His former roles include 16 years as founding managing director and chief investment officer and subsequently chairman of County Investment Management Ltd.


Director, Wesfarmers Ltd (2001- ) and Living Cell Technologies Limited (2006- ).


Chairman and director, IOOF Holdings Ltd (2002-2003).

Other:

Current: chairman, Sustainable Investment Research Institute Pty Ltd (2002- ) and Financial Reporting Council (FRC) (2003- ); director, Williamson Community Leadership Program Limited (2004- ); Victorian councillor, Australian Institute of Company Directors; member, New Zealand Accounting Standards Review Board and Investment Committee of Unisuper Ltd.

Former: chairman, Centre for Eye Research Australia Ltd (1996-2003); director of Famoice Technology Pty Ltd (2001-2004) and Vertex Capital Pty Ltd (2004-2006).

84


Directors’ report

John W Stocker - AO, MB, BSc, BMedSc, PhD, FRACP, FTSE Age 61

Dr Stocker joined Telstra as a non-executive director in October 1996. He is chairman of the Audit Committee and Technology Committee.

Experience:

Dr Stocker has had a distinguished career in pharmaceutical research and extensive experience in management of research and development, and its commercialisation including in his role as chief scientist for the Commonwealth of Australia (1996-1999).


Chairman, Sigma Pharmaceuticals Ltd (2005- ); director, Circadian Technologies Ltd (1996- ) and Nufarm Limited (1998- ).


Chairman, Sigma Company Ltd (1998-2005); director, Cambridge Antibody Technology Group plc (1995-2006).

Other:

Current: principal, Foursight Associates Pty Ltd.

Former: chairman, Grape and Wine Research and Development Corporation (1997-2004).

Peter J Willcox MAAge 60

Mr Willcox joined Telstra as a non-executive director on 17 May 2006.

Experience:

Mr Willcox holds a masters degree in physics from Cambridge University and following a 28 year career in the international petroleum industry was appointed as CEO of BHP Petroleum Limited, from 1986 to 1994. He has wide and diverse experience as a director and chairman of Australian and American listed companies. He is a fellow of the Australian Institute of Company Directors and sits on the advisory board of CVC Asia Pacific (Australia) Limited.


Chairman, Mayne Pharma (2005- ).

Directorships of listed companies – past three years:

Chairman, AMP Limited (2002- 2005) and Mayne Group Ltd (2002-2005).

Other:

Current: Director, CSIRO (2006- ).

Former: deputy chairman, Energy Developments Ltd (1994-2002), Lend Lease Corporation (1994-2000); director: J.H. Faulding & Co Ltd (1994-2001), James Hardie Industries Ltd (1994-2001), North Ltd (1994-2000), Schroders (Australia) Ltd (1994-1999), BHP Ltd (1988-1994), Woodside Petroleum (1986-1993), Tejas Gas Corporation (1987-1994) and Hamilton Oil Corporation (1987-1991).

85


Directors’ report

John D Zeglis BSc Finance, JD LawAge 59

Mr Zeglis joined Telstra as a non-executive director on 17 May 2006.

Experience:

Mr Zeglis has a legal background, and became partner with the law firm Sidley & Austin in 1978. His qualifications include a BSc in finance from the University of Illinois, and a JD in law from Harvard.

Mr Zeglis has had a long and distinguished career in the US telecommunications sector. He joined AT&T in 1984, and was elected as president of AT&T in 1998 and chairman and CEO of the AT&T Wireless Group in 1999. He continued as CEO of AT&T Wireless until retiring in November 2004 following the company’s sale to Cingular Wireless.


Director, Helmerich & Payne Corporation (1989- ).

Directorships of listed companies – past three years:

Director, Georgia Pacific Corporation (2001-2005).

Other:

Current: director, AMX Corporation; (2005- ) and State Farm Automobile Insurance (2004- ).

Former: director, Sara Lee Corporation (1998-2000) and Illinois Power Company (1992-1996).

During the year and through to the date of the report, the following directors resigned or retired:

• John E Fletcher resigned as a director on 30 June 2006;

• John T Ralph retired as a director on 11 August 2005;

• Anthony J Clark retired as a director on 11 August 2005; and

• Zygmunt E Switkowski resigned as a director on 1 July 2005.

A brief biography for each of the former directors is presented below:

John E Fletcher - FCPA

Mr Fletcher joined Telstra as a non-executive director in November 2000. He was a member of the Nomination Committee and the Remuneration Committee. John E Fletcher resigned as director on 30 June 2006.

Mr Fletcher has had extensive experience in management in the transport industry and was formerly chief executive of Brambles Industries Ltd. Mr Fletcher was employed by Brambles for 27 years, initially in an accounting role and then in a series of operating and senior management positions before being appointed as chief executive in 1993.

86


Directors’ report

John T Ralph - AC, FCPA, FTSE, FAICD, FAIM, FAusIMM, Hon LLD (Melbourne & Queensland), DUniv (ACU)

Mr Ralph joined Telstra as non-executive director and deputy chairman in October 1996. He was a member of the Audit Committee, Nomination Committee and Remuneration Committee. John Ralph retired as director on 11 August 2005.

Mr Ralph has had over 50 years of experience in the mining and finance industries. Mr Ralph was formerly chief executive and managing director of CRA Limited. He has previously served on the boards of several of Australia’s largest companies including the Commonwealth Bank of Australia Limited, BHP Billiton Limited and Fosters Group Limited.

Anthony J Clark - AM, FCA, FAICD

Mr Clark joined Telstra as a non-executive director in October 1996. He served on the Audit Committee until February 2005. Anthony Clark retired as director on 11 August 2005.

Mr Clark has had extensive experience in the accounting field, specialising in audit and advisory services and is a fellow of the Institute of Chartered Accountants and a fellow of the Australian Institute of Company Directors. Mr Clark was formerly a managing partner KPMG NSW.

Zygmunt E Switkowski - BSc (Hons), PhD, FAICD

Mr Switkowski was appointed CEO and executive director from March 1999. Zygmunt Switkowski resigned as CEO and executive director on 1 July 2005.

Formerly CEO of Optus Communications Ltd and chairman and managing director of Kodak (Australasia) Pty Ltd and the Business Council of Australia.

Qualifications and experience of our company secretary

Douglas C Gration - FCIS, BSc, LLB (Hons), GDip AppFin Age 40

Mr Gration was appointed company secretary of Telstra Corporation Limited in August 2001.

Before joining Telstra, Mr Gration was a partner in a leading national law firm. He specialised in corporate finance and securities law, mergers and acquisitions and joint ventures and other commercial contracts, and played a key role in the T1 and T2 privatisations. Mr Gration also advised on telecommunication regulatory matters. Other roles previously held in Telstra include deputy group general counsel and Infrastructure Services and Wholesale general counsel.

87


Directors’ report

Directors’ meetings

Each director attended the following Board and committee meetings during the year as a member of the Board or relevant committee:

Column a: number of meetings held while a member.Column b: number of meetings attended.

(1) Retired from the Board on 11 August 2005.(2) Appointed CEO and executive director on 1 July 2005.(3) Resigned from the Board on 30 June 2006.(4) Appointed to the Board on 17 May 2006.(5) Committee meetings are open to all directors to attend in an ex officio capacity.

Board Committees (5)

Audit Nominations Remuneration Technology

a b a b a b a b a b

D G McGauchie. . . 13 13 - - 4 4 4 4 - -

J T Ralph (1) . . . . . 1 1 1 1 2 2 2 2 - -

A J Clark (1) . . . . . 1 1 - - - - - - - -

S D Trujillo (2) . . . . 13 13 - - - - - - - -

J E Fletcher (3) . . . 13 13 - - 4 4 4 4 - -

B J Hutchinson . . . 13 13 6 6 - - - - - -

C B Livingstone . . 13 13 6 6 - - - - 2 2

C Macek . . . . . . . 13 13 6 6 4 4 4 4 - -

J W Stocker . . . . . 13 13 6 6 - - - - 2 2

P J Willcox (4) . . . . 2 2 - - - - - - - -

J D Zeglis (4) . . . . 2 2 - - - - - - - -

88


Directors’ report

Director and senior executive shareholdings in Telstra

As at 10 August 2006:

Directors

(1) Shares in which the director does not have a relevant interest, including shares held by the director related entities, are excluded from indirect interest.

Senior executives

(1) Shares in which the senior executive does not have a relevant interest, including shares held by related entities of the executive, are excluded from indirect interest.

Number of shares held

Directinterest

Indirect interest (1) Total

Donald G McGauchie. . . . . . . . . . . . . . . . . . . 1,866 55,775 57,641

Solomon D Trujillo . . . . . . . . . . . . . . . . . . . . - - -

Belinda J Hutchinson . . . . . . . . . . . . . . . . . . 38,912 35,866 74,778

Catherine B Livingstone . . . . . . . . . . . . . . . . . 11,637 23,051 34,688

Charles Macek. . . . . . . . . . . . . . . . . . . . . . . - 48,576 48,576

John W Stocker . . . . . . . . . . . . . . . . . . . . . . 2,953 94,288 97,241

Peter J Willcox . . . . . . . . . . . . . . . . . . . . . . . - 10,000 10,000

John D Zeglis . . . . . . . . . . . . . . . . . . . . . . . - - -

Number of shares held

Directinterest

Indirectinterest (1) Total

Bruce Akhurst . . . . . . . . . . . . . . . . . . . . . . . 4,880 17,000 21,880

Deena Shiff . . . . . . . . . . . . . . . . . . . . . . . . . 5,680 - 5,680

David Moffatt . . . . . . . . . . . . . . . . . . . . . . . 147,900 - 147,900

Kate McKenzie . . . . . . . . . . . . . . . . . . . . . . . - - -

John Stanhope. . . . . . . . . . . . . . . . . . . . . . . 57,221 - 57,221

David Thodey . . . . . . . . . . . . . . . . . . . . . . . 63,462 800 64,262

Gregory Winn . . . . . . . . . . . . . . . . . . . . . . . - - -

89


Directors’ report

Auditor’s independence declaration to the directors of Telstra Corporation Limited

In relation to my audit of the financial report of Telstra Group (comprising Telstra Corporation Limited and the entities it controlled during the year) for the financial year ended 30 June 2006, to the best of my knowledge and belief, there have been no contraventions of the auditor independence requirements of the Corporations Act 2001 or any applicable code of professional conduct.

Ian McPheeAuditor-General10 August 2006Canberra, Australia

90



91


Remuneration report

Remuneration report

This report for the year ended 30 June 2006 was prepared by the directors in accordance with the Corporations Act 2001. Under AASB 124 “Related Party Disclosures” (AASB 124), we are required to disclose remuneration details for our “key management personnel” (KMP). In addition to the directors, our KMP also includes the Chief Operating Officer and the Group Managing Directors listed in Figure 17. For the remainder of this report the KMP (other than the directors) will collectively be referred to as senior executives.

Remuneration at TelstraTelstra proactively manages executive and director remuneration arrangements to ensure that their remuneration is a key element supporting our business strategy by aligning reward to the achievement of strategic objectives. We also ensure that it is competitive in the markets we draw our talent from and that the needs of all stakeholders are taken into consideration when remuneration decisions are made.

The Remuneration Committee

The Telstra Board Remuneration Committee (Committee) is responsible for reviewing and recommending to the Board the remuneration policy, strategy and structure for Telstra’s Board, the CEO and senior executives. The Committee’s roles and responsibilities, composition and membership is detailed on our website. The Committee also has a responsibility to ensure that our remuneration strategy considers corporate governance principles and expectations of stakeholder bodies.

Any decision made by the Committee concerning an individual executive’s remuneration is made without that executive being present.

Remuneration policy

The Committee is guided by the following principles when formulating remuneration strategy and structure.

Changes to the remuneration strategy

During fiscal 2006 the Board approved a new business strategy for Telstra. The new strategy will transform the company over several years in order to meet the challenges of a competitive global market.

The policy, strategy and structure for the Board, CEO and senior executive remuneration is overseen and regularly reviewed by the Board’s Remuneration Committee.

The remuneration policy consists of principles that guide the Committee in its deliberations, and which should be taken into consideration when formulating the strategy and structure of remuneration.

Senior executive remuneration should: Non-executive director remuneration should:

reflect the size and scope of the role and be marketcompetitive in order to attract and retain talent be competitive in domestic and global markets motivate executives to deliver short and long term

business objectives be aligned with shareholder value creation be differentiated based on individual performance

be distinguished from executive remuneration be fee based, not performance based be partly remunerated in the form of equity in order

to align with the returns to shareholders

In line with major changes to Telstra’s business strategy this fiscal year, we have reviewed and updated our remuneration structure.

92


Remuneration report

With the new business strategy significantly changing the company’s commercial and operational focus, it was important to update the metrics used to determine incentive outcomes to give appropriate weight to Telstra’s new priorities. In parallel with the development of the business strategy, the Committee commissioned an extensive review of the remuneration strategy.

The focus of the remuneration review was to advise on contemporary market practice, the relationship between fixed and variable remuneration and the measures which would drive remuneration outcomes in the context of a significant strategic realignment of the business. The aim was to reward the CEO and senior executives on the delivery of transformational and operational outcomes in line with the key elements of the new business strategy. An additional objective of the review was to link the successful delivery of the transformation to future shareholder wealth creation. Management, with input from an external remuneration consultant, formally presented the results of the review to the Committee in December 2005.

The review concluded that the CEO and senior executive remuneration strategy would need to have increased flexibility in order to:

• focus on achieving long term transformation of the company while delivering on short term performance;

• reinforce and reward performance measures that will evolve with the company’s changing objectives;

• attract and retain world-class executive talent; and

• support a variety of employment arrangements and durations.

Introduction of new performance measures

The three elements of Telstra’s remuneration structure – fixed remuneration, short term incentives (STI) and long term incentives (LTI) – complement each other and will support the execution of business strategy in both the short and long term. These elements are consistent with previous years’ incentive plans. However, new performance measures (which are discussed in detail later in this report) have been introduced to encourage executives to focus on key business outcomes and to ensure that reward payouts occur when the company and the individual achieve the transformational and operational goals set by the Board.

Figure 1 illustrates how the remuneration strategy and structure are aligned to, and support, the business strategy through the use of performance measures.

Figure 1: Alignment of the business and remuneration strategies

93


Remuneration report

CEO and Senior ExecutivesRemuneration strategy

The senior executive remuneration strategy has been repositioned to drive the delivery of the transformation milestones that have been outlined in Telstra’s business strategy. Over the next 3 – 5 years, the remuneration strategy will be based on performance measures that are strongly aligned to those transformation outcomes as well as on other traditional business measures. The weighting of performance measures is expected to evolve over time from initial weighting on transformation measures to:

• operational measures for the STI; and

• growth and return measures for the LTI.

Figure 2 shows the proportion of the STI and LTI that depends on transformation measures for fiscal 2006. It is also indicative of how the emphasis on the transformation measures will diminish progressively as our transformation milestones are achieved. (However, it is not intended to represent future weightings of remuneration elements.)

Figure 2: Remuneration structure that supports Telstra’s transformational goals

Our remuneration strategy for the CEO and senior executives includes performance measures that are aligned to the key elements of Telstra’s new business strategy.

94


Remuneration report

Remuneration structure

When reviewing the structure and mix of the remuneration packages of the CEO and senior executives, the Committee takes into account:

• remuneration practices in other major corporations in Australia (in terms of both salary levels and the ratio between fixed and “at risk” components);

• remuneration practices of global corporations within our comparative peer group; and

• a range of macro-economic indicators used to determine likely movements in broad salary rates.

For fiscal 2006, the remuneration structure for the CEO and senior executives consisted of:

• fixed remuneration;

• short term incentive (“at risk”); and

• long term incentive (“at risk”).

Linking the remuneration structure to the business strategy

Figure 3 shows in detail how the remuneration structure is designed to satisfy the requirements of the new business strategy, by setting and monitoring specific performance measures for the various elements of remuneration.

Ordinarily, the Committee considers, and recommends to the Board, the measures and targets for the incentive plans during the annual budget setting process. However, for fiscal 2006, the Committee considered the remuneration strategy in parallel with the strategic review of the company. The Committee recommended that the incentive measures should focus on the transformation through to fiscal 2010. The fiscal 2010 strategic targets outlined to shareholders in November 2005 were used as a starting point to determine the fiscal 2006 STI and LTI performance measures.

To link the remuneration structure to business strategy, the Committee prioritised the business’ strategic objectives by considering:

• what could be measured;

• what objectives would have the greatest impact; and

• what aggregate of measures would best support the key themes of the strategy.

At the end of each financial year, the Committee reviews the company’s audited financial results and the results of the other performance measures, and assesses performance against each measure to determine the percentage of STI and LTI that is payable. Measures are tracked by an internal project office and, where appropriate, the achievement against targets will be independently audited.

The remuneration structure ensures that rewards are linked to strategic outcomes.

The main benefits of linking senior executives’ rewards to specific performance measures are to increase focus and understanding by senior executives of the key strategic objectives of the business and provide motivation by rewarding employees on strategy execution.

95


Remuneration report

Figure 3: Performance measures selected to ensure a focus on key business strategies

In the case of Bruce Akhurst the STI is measured against specific financial metrics for Sensis in lieu of the Telstra financial and transformational measures detailed above. Sensis EBIT contribution and Cashflow make up 80% of his STI and the remaining 20% is based on individual accountabilities.

To ensure the continued alignment of transformation objectives, the creation of value and executive reward, the Committee initiated a review of the linkage between the remuneration strategy and business strategy. Any changes to the remuneration strategy as a result of this review will be reported to shareholders.

Remuneration element

Performance measures

How is it measured? Link to business strategy

STI(Cash)

Company Financial EBITDA - Earnings before interest, tax, depreciation, amortisation.

To achieve earnings objective.

Cost Reduction Amount of accelerated cost savings.

To identify and deliver near term operating cost saving benefits that enable investment in transformation initiatives.

3GSM 850 Network The number of sites that are 3G equipped and receiving transmission.

To deliver on the wireless strategy that enables mobile revenue growth, reduces cost and optimises the mobile business.

Broadband marketshare

The increase in Telstra’s share of retail broadband customers.

To achieve an increase in Telstra’s retail broadband marketshare.

Individual accountabilities

The achievement of personal goals which include business unit specific targets.

To align the individual’s personal goals with the business’ goals.

LTI(Performance

Rights)

Revenue Growth The year over year revenue growth rate over the periods – 3 and 5 years.

To drive the development of new revenue and overall growth.

Operating Expense The total operating expense growth rate over the periods –3 and 5 years.

To drive cost control and restructure the cost base of the company.

IT Transformation milestones

The time taken to achieve a targeted reduction of Business Support Systems (BSS) and Operational Support Systems (OSS).

To reduce complexity, reduce cost and provide an enhanced customer experience by reducing the number of systems.

Network Transformation milestones

The time taken to achieve network simplification and build a new platform.

To simplify the network to reduce complexity and cost, while providing a new platform for revenue growth.

Return on Investment (ROI) over 3 years

EBIT over Average Investment (Average of Net Debt plus Shareholder Funds).

To measure the return gained from the financial investment in the transformational goals.

Total Shareholder Return (TSR) Growth over 5 years

Absolute growth in share price and accumulated dividends from19 August 2005.

To measure the value derived from execution of the business strategy.

96


Remuneration report

Remuneration mix

The remuneration mix describes the ratio of the different components of an executive’s pay. To strengthen the link to company performance, the Board has determined that a significant proportion of the total remuneration for the CEO and senior executives should be “at risk” representing components that are awarded based on performance. This means senior executives can only earn significant rewards if pre-determined company measures and targets are achieved. The “at risk” components of a senior executive’s remuneration package are calculated by reference to that individual’s fixed remuneration.

Figure 4 shows the remuneration mix based on the maximum level of reward for the CEO and senior executives.

Figure 4: Telstra’s remuneration mix

If the minimum performance level is not achieved, no STI or LTI will be awarded and the executive receives 100% of fixed remuneration and 0% of their “at risk” remuneration. The percentage of “at risk” pay increases with the increase in accountability.

Fixed remuneration

Fixed remuneration is made up of:

• base salary including salary sacrifice benefits and applicable fringe benefits tax; and

• superannuation.

Executive remuneration is composed of both “fixed” and “at risk” elements.

Fixed remuneration is in line with similar roles in the applicable market.

97


Remuneration report

Fixed remuneration is influenced by the scope of the role and the knowledge, skills and experience required of the position holder. To ensure remuneration is market competitive, the Committee takes into account local, home country and global market rates. In determining what market rates to use for comparison purposes the Committee assesses a range of factors including company size (based on market capitalisation), industry in which the comparative company operates and global footprint.

For superannuation, in addition to mandatory contributions, the CEO and senior executives may contribute additional amounts, subject to legislative requirements.

Fixed remuneration is reviewed annually as part of the company’s overall remuneration review process and is assessed against the company’s and the individual’s performance.

For fiscal 2006, the CEO was responsible for reviewing and determining the remuneration of the company secretary. However, the remuneration policy described in this report in relation to the senior executives and the discussion of the relationship between that policy and our performance applies to the company secretary. The company secretary participates in the STI plan and the LTI plan on the terms set out in this report.

Short term incentive (STI)

The STI is an annual “at risk” component of remuneration for the CEO and senior executives. During fiscal 2006, the Committee ceased the Short Term Incentive Equity (STIE) Plan. As such the annual STI payment for fiscal 2006 is delivered in cash, compared with fiscal 2005 when the STI was delivered half in cash and half in equity instruments. The objective of the STI plan is to encourage executives to meet annual business objectives and their own individual performance targets.

How STI is calculated

The CEO and senior executives’ STI payment is based on their fixed remuneration, individual STI opportunity (explained below) and achievements against performance measures. This is illustrated in Figure 5.

Figure 5: Calculating the STI payment

STI opportunity and performance levels required

Depending on the role they perform, each senior executive has an STI opportunity ranging from 100% - 140% of fixed remuneration where maximum performance is met. The maximum STI opportunity varies according to the role. As illustrated in Figure 6, each of the performance measures has three different levels of performance.

The STI component delivers reward on achievement of annual performance targets.

98


Remuneration report

Figure 6: STI opportunity for differing levels of performance

The level of performance determines the level of payment against each weighted measure. Achieving the target level of performance on each measure therefore equates to 50% of an individual’s maximum STI payment.

The STI performance measures

Performance against specific measures is assessed before any individual’s STI payment can be determined. The individual accountabilities for the CEO are determined by the Board and that of the senior executives are determined by the CEO. All individual measures are strongly aligned to the individual’s contribution towards corporate and business unit objectives.

STI payment for the CEO

The CEO’s contract provides for an STI payment for fiscal 2006 of up to a maximum of A$3 million, of which $1.5 million was paid on commencement of employment. The initial $1.5 million was paid subject to the successful delivery of the new business strategy and transformation plan for the company. This payment was disclosed in the 2005 Remuneration Report.

The remaining maximum potential payment of $1.5 million will be paid subject to the CEO satisfying the performance measures described in Figure 3.

Long term incentive (LTI)

The LTI is the second “at risk” component of remuneration and it is delivered in the form of performance rights for fiscal 2006. Performance rights are the right to acquire a Telstra share at minimal cost to the employee ($1 exercise price per parcel of shares exercised on any single day) when specified performance measures are achieved. The performance rights are administered through the Telstra Growthshare Trust.

In prior years the equity instruments allocated as part of the LTI plans included restricted shares, options, deferred shares and performance rights.

The LTI plan supports the business strategy by aligning executive compensation with key performance measures and targets that support the transformation. The LTI is limited to the 220 most senior employees, as this group is responsible for leading the transformation and will drive the success of the business.

Level of performance(% of STI opportunity)

DescriptionCEO

Senior Executives

(% of fixed remuneration)

Gateway (25%) The “gateway” level must be reached before any value can be attributed to each measure.

25% 25% - 35%

Target (50%) The “target” level represents challenging but achievable levels of performance.

50% 50% - 70%

Maximum (100%) Achievement of the “maximum” level requires significant performance above and beyond normal expectations and will result in significant improvement in key operational areas.

100% 100% - 140%

99


Remuneration report

How performance rights are allocated

The CEO and senior executives receive an allocation of performance rights that is calculated as a percentage of their fixed remuneration.

Figure 7: Calculating the allocation of performance rights

*The full market value of a Telstra share is used when we allocate performance rights (5 day volume weighted average share price). This differs from the accounting value under the executive remuneration table in Figure 17, which reflects the amortised accounting valuation of these rights and any other LTI equity granted in previous years.

Vesting

The performance rights that the CEO and senior executives receive will vest depending upon the company’s achievement of the relevant performance measures. Performance rights that have vested means that the executive has a full interest in the right and is free to exercise the right at any time until the expiry date. The allocation, test and expiry dates are illustrated in Figure 8.

Figure 8: Performance right timeline

The value of the LTI at vesting

The actual value to the executive of the LTI at vesting can be calculated using the formula in Figure 9.

Figure 9: Determining the market value of performance rights at vesting dates

*This value is likely to be different from the values at allocation and the accounting values disclosed in the remuneration table in Figure 17.

The LTI performance measures

Similar to the STI plan, the LTI performance measures are also linked to the business strategy and transformation of the company. This approach ensures that any rewards derived from the LTI plan by the senior executives are consistent with the successful execution of the initiatives over a number of years. Successful execution of the initiatives should, in turn, drive sustainable increases in shareholder wealth.

The measures will be assessed based on a scale of performance at 30 June 2008 and 30 June 2010. The vesting arrangements are explained in Figure 10.

100


Remuneration report

Figure 10: LTI vesting arrangements for fiscal 2006

Exercising performance rights

A performance right can only be exercised (that is, a share can only be acquired by the executive) if the performance right vests. Once vested, the performance right can be exercised by the executive at any time up to 7 years from the grant date. Once the performance rights have been exercised the participant becomes the beneficial owner and is entitled to any dividend, bonus issue, return of capital or other distribution in respect of those shares.

Restrictions on hedging

The CEO and senior executives are restricted from entering into arrangements which effectively operate to limit the economic risk of their security holdings in shares allocated under the LTI plan during the period the shares are held in trust.

Lapsed performance rights

Where a performance right does not vest by year 5, because the performance measures have not been achieved, the right will lapse and no benefit will accrue to the executive.

If the CEO or a senior executive:

• resigns and their performance rights are not yet exercisable, those rights will lapse;

• retires or ceases employment due to death or total permanent incapacity, and their performance rights are not yet exercisable, those rights will be exercisable if the relevant performance measure is met in accordance with the prescribed schedule;

• is made redundant, and their performance rights are not yet exercisable, the number of unvested rights is adjusted to reflect the executive’s service period and will be exercisable if the relevant performance measure is met in accordance with the prescribed schedule; or

• ceases employment with Telstra for any other reason and their performance rights are not yet exercisable, the Board will decide whether those rights should lapse or remain available for exercise if the relevant performance measure is met.

Year 3 Year 5

Target not achieved

25% of performance rights for Year 3tranche lapses. The remaining 75% of performance rights

will be added to the Year 5 tranche andmay vest based on performance againstthe Year 5 performance scale.

All unvested performance rights will lapse.

Target achieved but below Maximum

The number of performance rights veston a scale between Target andMaximum. Any performance rights that do not vest

will be discounted by 25% and thebalance added to the Year 5 tranche andmay vest on the Year 5 performancescale for each measure.

For the Year 5 tranche the number ofperformance rights vest on a scalebetween Target and Maximum. The carried forward Year 3 balance will

be added to the Year 5 tranche and assessedagainst the Year 5 performancetargets. Any performance rights that do not vest

as a result of not reaching the Maximumof the Year 5 hurdle will lapse.

Maximum achieved

All performance rights for the Year 3tranche (up to 60% of the 2005allocation) will vest if all maximumtargets are achieved.

All performance rights for the Year 5tranche (up to 40% of the 2005allocation), and any remaining Year 3tranche, will vest if all maximum targetsare achieved.

101


Remuneration report

Relationship between remuneration and Telstra’s performance

The payment levels of the “as risk” components of remuneration should reflect Telstra’s corporate performance.

Defining “company performance”

Shareholder wealth

Shareholder wealth is the total return to an investor over a given period. It consists of three components: dividends paid, the movement in the market value of shares over that period, and any return of capital to shareholders, excluding buy-backs.

Dividends paid

Over the five years to 30 June 2006 we have increased the total amount returned to shareholders through dividends and special dividends each year. Our total dividends paid per share each fiscal year for the last five years is shown in Figure 11.

Market value of shares

During fiscal 2006 Telstra’s daily closing share price has fluctuated between a low of $3.63 and a high of $5.14. Figure 11 shows the share price on 30 June for the last five years.

Figure 11: Share price at year end and dividends paid per share for the last 5 years

Return of capital

During the five years to 30 June 2006 we undertook two off-market share buy-backs as part of our capital management strategy, returning $1,751 million (excluding associated costs) to shareholders. All ordinary shares bought back were subsequently cancelled.

Figure 12: Share buy back

Telstra ultimately assesses its company performance by reference to increases in “shareholder wealth” and “earnings”.

Year ended30 June 2006




Year ended 30 June 2002

Share Price ($) 3.68 5.06 5.03 4.40 4.66

Total dividends paid/declared per share (c) 34.0 40.0 26.0 27.0 22.0

Date

Number of ordinary

shares bought back

Cost

Buy-back price per

share$

Franked dividend

componentper share

$

Capital component

per share$

Purchase consideration

$ m

Transaction costs$ m

24 Nov 2003 238,241,174 1,001 8 4.20 2.70 1.50

15 Nov 2004 185,284,669 750 6 4.05 2.55 1.50

102


Remuneration report

Earnings

Our company’s earnings over the five years to 30 June 2006 are summarised in Figure 13.

Figure 13: Our 5 year earnings history

(1) During fiscal 2006, we adopted Australian equivalents to International Financial Reporting Standards (A-IFRS). We restated our comparative information for the year ended 30 June 2005. The previous financial years ended 30 June 2004, 30 June 2003 and 30 June 2002 are presented under the previous Australian Generally Accepted Accounting Principles (AGAAP).

Remuneration vs company performance

As stated in our remuneration strategy, a significant proportion of the CEO and senior executives’ total remuneration depends on the achievement of specific short and long term targets.

STI results and payments

Financial measures have represented a significant percentage of the STI plan over the last five years and therefore financial performance has a direct impact on the rewards received through the plan. The financial measures:

• provide a strong correlation with our ability to increase shareholder returns;

• have a direct impact on our bottom line; and

• are measures over which the executives can exercise control.

The average STI received by senior executives as a percentage of the maximum achievable payment for achieving those short term measures is reflected in Figure 14.

Figure 14: Average STI payment as a % of maximum payment

(1) This includes both the cash and equity components for fiscal 2005. While the total equity component is included in determining the above percentage, the value of the rights to Telstra shares granted in fiscal 2005 will be reflected in remuneration over the following 3 years as the shares vest over their performance period.

The above calculation is made by aggregating the actual STI payments to the CEO and senior executives for the financial year and dividing that by the aggregate maximum achievable payments for those same executives. The result is then expressed as a percentage of the maximum achievable STI payment.


$m


$m


$m(1)


$m(1)


$m(1)

Sales revenue 22,750 22,161 20,737 20,495 20,196

EBITDA 9,584 10,464 10,175 9,170 9,483

Net profit available to Telstra

3,181 4,309 4,118 3,429 3,661

Telstra’s remuneration strategy aligns with the new business strategy by assigning clear transformational and operational targets with longer term objectives which will deliver increases in shareholder wealth.

Fiscal 2006

Fiscal 2005

Fiscal 2004

Fiscal 2003

Fiscal 2002

STI received 73.8% 54.6%(1) 31.4% 41.1% 57.6%

103


Remuneration report

Relationship between company performance and STI payments

Figure 15 demonstrates the relationship between the company’s performance in the form of EBITDA and the percentage of STI payments that were made in each fiscal year.

Figure 15: Relationship between company performance (EBITDA) and STI payments

LTI results and payments

Any LTI awarded to an executive is required to be reported in accordance with International Financial Reporting Standards (IFRS). This requires a value to be attributed to the LTI equity granted before vesting has occurred. That value is then amortised over the vesting period (ie the five-year performance period for fiscal 2006 allocations). However, as vesting of any equity allocated under the LTI plans is subject to a range of internal and external performance measures, senior executives may or may not ultimately derive any value from these equity instruments.

As at 30 June 2006 the vesting status of LTI equity is as follows:

Figure 16: LTI Status

* March allocations were mid-cycle allocations to accommodate new executives.

Status of plan Result Next steps

The fiscal 2001 plans (September 2000 and March 2001*) did not meet the performance measure.

All instruments have lapsed.

The performance period for these plans expired in fiscal 2006 and both plans have ceased.

The fiscal 2002 plans (September 2001 and March 2002*) did not meet the performance measure in the first quarter of the performance period.

Half of all allocations lapsed.

For September 2001, the performance measures were subsequently achieved in fiscal 2005 and the remaining half of the allocations vested. The March 2002 plan performance measures are currently below the required performance hurdle.

The fiscal 2003 plan did not meet the performance hurdle in the first quarter of the performance period.

Half of all allocations lapsed.

The performance measures are currently below the required performance hurdle.

Fiscal 2004, 2005 and 2006 plans have yet to enter their respective performance periods.

No instruments have lapsed or vested yet.

Performance measures have not yet reached the assessment points.

104


Remuneration report

Details of senior executives’ remuneration

In this section we set out the remuneration of our CEO and the senior executives who are key management personnel. These executives had authority and responsibility for planning, directing and controlling the activities of Telstra and its controlled entities during fiscal 2006. They also include the five highest remunerated executives.

Figure 17 sets out the short term employee benefits, post-employment benefits and share-based remuneration received during the fiscal year as calculated under applicable accounting standards. It also details the remuneration components of those senior executives who ceased employment with Telstra during fiscal 2006 and would otherwise have been included in this report.

Figure 18 sets out the details of the annual STI for fiscal 2006, and Figure 19 sets out the amortised value of the CEO and senior executive allocations under the LTI plans.

Remuneration received in fiscal 2006

The remuneration of our key management personnel (excluding non-executive directors) are set out in the following tables. In accordance with the requirements of AASB 124, the remuneration disclosures for fiscal 2006 only include remuneration relating to the portion of the relevant periods that each individual was considered a KMP. As a result this approach can distort year-on-year remuneration comparisons.

Termination payments to Dr Switkowski in fiscal 2006

As specified in the remuneration report for fiscal 2005 Dr Switkowski ceased employment with the company on 1 July 2005 and was entitled to receive termination payments in accordance with his employment contract including:

• a termination payment of 12 months fixed remuneration - $2,092,000; and

• accrued annual and long service leave - $1,059,526.42.

These payments have been aggregated and appear in Figure 17under “Termination benefits” in accordance with the prescribed accounting standards.

Dr Switkowski also received a payment of $1,961,000 under the 2004/05 STI plan. This payment is not included in Figure 17 as it has previously been disclosed in the remuneration report for fiscal 2005.

In addition, and consistent with last years remuneration report, Figure 21 shows Dr Switkowski’s retained allocations of equity under the Deferred Remuneration and LTI plans.

Detailed explanation of the various components of remuneration received by the CEO and senior executives in fiscal 2006.

105


Remuneration report

Figure 17: Senior executives’ remuneration

106


Remuneration report

Figure 17: Senior executives’ remuneration (cont.)

107


Remuneration report

Figure 18: STI for fiscal 2006

Tax Equalisation of foreign earned income

As prefaced in their employment contracts, Mr Trujillo and Mr Winn received re-imbursement for the additional personal income tax payable due to a double taxing in Australia and the United States as a result of the international taxation rules covering foreign earned income. This only applies for fiscal 2006 as changes to the international taxation provisions come into effect on 1 July 2006 and no further payments will be required.

Equity valuations

Figure 19 provides the amortised accounting value of all LTI equity instruments, including allocations of equity made from fiscal 2001 – 2006.

The senior executives have not received any monetary value from any of these equity grants apart from the September 2001 Performance Rights plan and the September 2002 Deferred Share plan (see Figure 20), either because the LTI performance measures were not satisfied during the performance period or the performance period is continuing. The value attributed to the unvested instruments allocated on 8 September 2000 and 16 March 2001 only reflects the notional value until 8 September 2005 and 16 March 2006, respectively, when they lapsed.

Where allocations have been made to the CEO and senior executives for fiscal 2002, 2003, 2004, 2005 and 2006 and have not yet vested, the CEO and senior executives may or may not derive any value from these allocations as they are still subject to performance measures and the performance period has not yet expired.

108


Remuneration report

Figure 19: Amortised accounting value of all LTI equity for fiscal 2006

(1) The value of each instrument is calculated by applying option valuation methodologies as described in note 31 to the financial statements and is then amortised over the relevant vesting period. The values included in the table relate to the current year amortised value of all LTI instruments detailed as other equity in the remuneration table. The valuations used in current year disclosures are based on the same underlying assumptions as the previous year. Please refer to note 31 for details on our employee share plans.

(2) Where a vesting scale is used, the table reflects the maximum achievable allocation.(3) The September 2002 plan failed to satisfy the performance measure in the first quarter of the performance period. In accordance with the

terms of the plan half the maximum potential allocation of performance rights lapsed on 6 December 2005. Although an accounting value is recorded above, the executives received no value from this plan.

(4) This represents the pro-rated amortised value of LTI instruments up to date of separation in accordance with accounting standards. These equity instruments are still subject to meeting performance hurdles and Dr Switkowski may or may not derive any value from these instruments.

Outstanding equity-based instruments

The accounting value and actual number of the CEO and senior executives’ performance rights, restricted shares and options that were granted, exercised and lapsed in fiscal 2006 are set out in Figure 20 and Figure 21. As the values shown in Figure 20 represent the accounting value, the executive may not have actually received these amounts. The value of lapsed instruments in Figure 20 is based on the accounting value. This value is included to address our reporting obligations only. Where these instruments lapse, there is no benefit at all to the executive, and therefore no transfer of any equity or equity-related instrument. All instruments that have lapsed were subjected to the external performance measure of Total Shareholder Return (TSR).

Amortised value of LTI equity allocations (1) (2) Total

Options($)

Performancerights (3)

($)

Restricted shares ($)

($)

Solomon Trujillo - 309,305 - 309,305

Bruce Akhurst 290,185 354,513 5,338 650,036

Kate McKenzie - 30,871 - 30,871

David Moffatt 367,050 391,010 21,401 779,461

Deena Shiff 82,016 131,691 684 214,391

John Stanhope 113,080 220,808 1,916 335,804

David Thodey 241,368 319,421 - 560,789

Gregory Winn - - - -

Zygmunt Switkowski (4) 1,743 2,737 36 4,516

109


Remuneration report

Figure 20: Value of equity instruments granted, exercised and lapsed in fiscal 2006

(1) This represents the accounting value at grant date of performance rights granted in fiscal 2006.(2) Total Remuneration is the sum of short term benefits, post employment benefits and share based payments detailed in Figure 19.

The actual number of LTI instruments that were granted, exercised and lapsed in fiscal 2006 is set out in Figure 21. Of the performance rights allocated in fiscal 2006, 100% of the allocations were granted and none were forfeited, lapsed or vested during fiscal 2006. However, all unvested equity instruments may lapse in future years if the performance measures are not satisfied.

Figure 21: Number of equity-based instruments – granted, vested, exercised and lapsed

Granted during period (1)

Exercised

($)

Lapsed

($)

Aggregate of rights granted, exercised and

lapsed ($)

($)% of Total

Remuneration(2)

Solomon Trujillo 2,482,011 28.5% - - 2,482,011

Bruce Akhurst 436,714 11.6% - - 436,714

Kate McKenzie 164,838 34.1% - - 164,838

David Moffatt 444,159 13.5% - - 444,159

Deena Shiff 297,846 15.2% - - 297,846

John Stanhope 384,589 17.1% - - 384,589

David Thodey 403,578 14.3% - - 403,578

Gregory Winn - - - - -

Zygmunt Switkowski - - - - -

InstrumentBalance at 1 July

2005

Granted during

period (1)

Exercised during period

Lapsed during

period (2)

Balance at30 June 2006 (3)

Vestedbut not

exercised during

period (4)

Solomon Trujillo Performance Rights - 836,821 - - 836,821 -

Bruce Akhurst Performance Rights 473,600 147,240 59,000 66,900 494,940 -

Restricted shares 39,000 - - 39,000 - -

Options 805,000 - - 188,000 617,000 -

Deferred shares 135,300 - 66,900 - 68,400 -

Incentive shares - 120,967 - - 120,967 -

Kate McKenzie Performance Rights 36,000 55,576 - - 91,576 -

Restricted shares - - - - - -

Options - - - - - -

110


Remuneration report

(1) Instruments granted during fiscal 2006 relate to the annual LTI plan for fiscal 2006 and the STI plan for fiscal 2005.(2) No equity instruments granted during fiscal 2006 lapsed in fiscal 2006.(3) This represents the number of vested and unvested equity instruments which have not been exercised or lapsed as at 30 June 2006, or in the

case of Dr Switkowski, the date of cessation with Telstra.(4) The number of instruments that vested during fiscal 2006 relate to the September 2002 Deferred Shares and had not been exercised at 30

June 2006.

Deferred shares - - - - - -


David Moffatt Performance Rights 521,600 149,750 71,000 76,300 524,050 -


Options 890,000 - - 150,000 740,000 -

Deferred shares 152,400 - 76,300 - 76,100 -


Deena Shiff Performance Rights 151,600 100,420 17,000 19,800 215,220


Options 202,200 - - 24,200 178,000 -

Deferred shares 42,300 - 19,800 - 22,500 -


John Stanhope Performance Rights 290,000 129,666 23,000 23,800 372,866 -


Options 310,000 - - 69,000 241,000 -

Deferred shares 73,200 - 23,800 - 49,400 -


David Thodey Performance Rights 427,200 136,068 51,000 59,000 453,268 -

Restricted shares - - - - - -

Options 534,000 - - - 534,000 -

Deferred shares 121,600 - - - 121,600 59,000


Greg Winn - - - - - - -

Zygmunt Switkowski Performance Rights 1,643,600 - - - 1,643,600 -

Restricted shares 96,000 - - - 96,000 -

Options 1,810,000 - - - 1,810,000 -

Deferred shares 500,700 - - - 500,700 -

111


Remuneration report

Contract arrangements

The key terms and conditions for the CEO and senior executive service contracts are set out in Figure 22.

A contract typically outlines the components of remuneration paid to the executive but does not prescribe how remuneration levels are to be modified from year to year.

Generally, contracts can be terminated by either the company or senior executive providing 6 months notice. Upon notice being given Telstra can require the executive to remain employed by Telstra for the notice period or terminate employment immediately by providing payment in lieu of notice.

Figure 22: Summary of contract arrangements for CEO and senior executives

(1) Upon notice being given Telstra can require the executive to work through the notice period or terminate employment immediately by providing payment in lieu of notice.

(2) Payment is calculated on fixed remuneration as at date of termination. There will be no payment if termination is a result of serious misconduct or redundancy (in which case Telstra’s redundancy policy applies).

(3) A 24 month termination payment applied where Mr Trujillo’s employment was terminated in the first 12 months. As this period has now expired the standard 12 month termination payment will apply.

(4) Where both parties mutually agree, the contract can be extended by 12 months until 8 August 2008. Where extended, and termination occurs between 2-3 years of employment, Mr. Winn is paid the lesser of: remaining fixed remuneration to completion or 6 months fixed remuneration and pro-rata 3rd year contract completion payment (where pro-rata performance is met).

(5) Contract completion payments are in lieu of LTI participation (due to fixed term contract). Payment of up to $1.8m subject to performance against pre-determined measures. Where contract is extended an additional contract completion payment of $500,000 is available.

NameTerm of

agreement

Fixed remuneration at

30 June 2006

Additional conditions

Notice Period(1) Termination payment (2)

Solomon Trujillo Ongoing $3,000,000 nil 30 days 12 months(3)

Bruce Akhurst Ongoing $1,173,000 nil 6 months 12 months

Kate McKenzie Ongoing $530,000 nil 6 months 12 months

David Moffatt Ongoing $1,193,000 nil 6 months 12 months

Deena Shiff Ongoing $800,000 nil 6 months 12 months

John Stanhope Ongoing $1,033,000 nil 6 months 12 months

David Thodey Ongoing $1,084,000 nil 6 months 12 months

Gregory Winn 11 August 2005 to

10 August 2007(4)

$1,450,000 $500,000 sign on bonus paid 12 Sept 2005.

Contract completion payments(5)

3 months 6 months + pro-rata at target STI + pro-rata contract completion

payment (where pro-rata performance met)

Zygmunt Switkowski 1 September 2003 to

31 December 2007

$2,092,000 nil 6 months 12 months

112


Remuneration report

Relocation costs associated with overseas senior executives

During the year the Board implemented significant changes to the executive management team. In addition to Solomon Trujillo joining Telstra as the Chief Executive Officer, a number of key executives were recruited to drive the major transformational changes required under the new business strategy.

Where executives have been recruited from overseas, appropriate reward to secure their employment was negotiated. This can include overseas relocation benefits in accordance with our relocation policies or the executives’ contract of employment.

The range of benefits and services provided to these senior executives under those arrangements may include:

• travel to Australia for themselves and their immediate family on commencement;

• a defined number of round-trip air tickets to their place of origin for themselves and their family;

• furniture storage and removal costs;

• rental assistance while in Australia for an initial period of time;

• a relocation allowance to cover incidental and miscellaneous expenses;

• health insurance;

• tax advice; and

• tax equalisation of foreign earned income.

Non-executive directorsRemuneration policy and strategy

Our non-executive directors are remunerated in accordance with our constitution, which provides for the following:

• an aggregate limit of fees is set and varied only by approval of a resolution of shareholders at the annual general meeting; and

• the Board determines how those fees are allocated among the directors within the fee pool.

In recognition of the increased time and responsibility of non-executive directors, on 25 October 2005, shareholders approved an increase to the directors’ fee pool to $2,000,000 per annum (previously $1,320,000 per annum). As a result of this increase:

• fees paid to Board members, including additional fees paid for service on Board committees were increased; and

• existing retirement benefits to non-executive directors, employed before 1 July 2002, were integrated into the overall fee pool.

In order to maintain their independence and impartiality, non-executive directors are remunerated with fees which are not linked to company performance. The total fee pool is approved by shareholders.

113


Remuneration report

In determining the required level for the fee pool and individual director fee levels, the Committee makes recommendations to the Board, and in the case of the fee pool, the Board makes a recommendation to shareholders, taking into account:

• the company’s existing remuneration policies;

• independent professional advice;

• the fee pools of other comparable companies (based on company size using market capitalisation);

• fees paid to individual directors by comparable companies;

• the general time commitment and responsibilities involved;

• the risks associated with discharging the duties attaching to the role of director; and

• the level of fees necessary to attract and retain directors of a suitable calibre.

In order to maintain their independence and impartiality, the remuneration of the non-executive directors is not linked to the performance of the company, except through their participation in the Directshare plan, which is explained below.

Remuneration structure

All Board and committee fees, including superannuation, paid to non-executive directors in fiscal 2006 remain within the new fee pool. Board and Committee fees were increased in fiscal 2006 to take into account the changes to retirement benefits made following the 2005 Annual General Meeting and prevailing market rates for directors’ fees. Following these increases the Board and Committee fees payable to directors in fiscal 2006 are set out below.

Board fees

Committee fees

Board members, excluding the Chairman, are paid the following additional fees for service on Board committees:

The Board considered these fees appropriate given the additional time requirements of committee members, the complex matters before the committees and, in the case of the Audit Committee, an increased number of committee meetings and governance requirements.

Non-executive directors receive a total remuneration package based on their role on the Board and their committee memberships. Non-executive directors must sacrifice at least 20% of their fees into Telstra shares to align their interests with those of our shareholders.

Chairman Director

Board $450,000 $130,000

Committee Chairman Member

Audit Committee $70,000 $35,000

Remuneration Committee $14,000 $7,000

Nomination Committee - $7,000

Technology Committee $7,000 $7,000

114


Remuneration report

Components of the total remuneration package (TRP)

The Board has determined that a non-executive director’s total remuneration will consist of three components: cash, shares (through the Directshare plan) and superannuation. Each year directors are asked to specify the allocation of their total remuneration between these three components, subject to the following conditions:

• at least 30% must be taken as cash;

• at least 20% must be taken as Directshares; and

• the minimum superannuation guarantee contribution must be made, where applicable.

The Board will continue to periodically review its approach to the non-executive directors’ remuneration structure to ensure it compares with general industry practice and best practice principles of corporate governance.

Equity compensation – Directshare

Directshare aims to encourage a longer-term perspective and to align the directors’ interests with those of our shareholders.

Through our Directshare plan, non-executive directors are required to sacrifice a minimum of 20% of their TRP towards the acquisition of restricted Telstra shares. The shares are purchased on-market and allocated to the participating non-executive director at market price. The shares are held in trust and are unable to be dealt with for 5 years unless the participating director ceases to be a director of Telstra.

If a non-executive director chooses to increase their participation in the Directshare plan, they take a greater percentage of TRP in Telstra shares, and their cash component is reduced. As the allocation of Directshares is simply a percentage of the non-executive director’s TRP, it is not subject to the satisfaction of a performance measure.

Directors are restricted from entering into arrangements which effectively operate to limit the economic risk of their shareholdings allocated under the Directshare plan during the period the shares are held in trust.

Superannuation

Mandatory superannuation contributions are included as part of each director’s total remuneration. Directors may choose to increase the proportion of their remuneration taken as superannuation, subject to legislative requirements.

Retirement benefits

In accordance with good corporate governance practice, we do not provide retirement benefits for directors appointed after 30 June 2002. However, non-executive directors appointed before that date were eligible to receive retirement benefits on retiring as a director.

At the annual general meeting on 25 October 2005, we explained that as a result of the increase in the directors’ fee pool, retirement benefits would cease to accrue. This means that directors who were appointed before 30 June 2002 will receive cash equal to the benefits accrued to 25 October 2005. These benefits will be indexed by reference to changes in Telstra’s share price between that date and the date the director’s retirement takes effect.

115


Remuneration report

This approach:

• aligns directors’ interests with those of stakeholders and with the long term success of the company;

• subjects the value of the retirement benefit to movement in Telstra’s share price and dividend payments; and

• maintains the principle that this payment be made when the director retires, rather than provide an early cash payout of the retirement benefits at the time these arrangements were approved.

Figure 23 shows the increase in retirement benefits payable to non-executive directors appointed before 30 June 2002 and the value of the payment to the director if he or she had retired on 30 June 2006.

Figure 23: Non-executive directors – increases in retirement benefits

(1) The value is calculated by multiplying the number of notional shares plus additional notional sharesallocated for re-invested dividends by $3.68 being the volume weighted average price of Telstra shares traded on 30 June 2006.

(2) John Fletcher resigned as a director on 30 June 2006 and was paid this amount in accordance with the retirmenet benefit policy. This amount is also included as a termination payment in Figure 24.

Other benefits

Directors also receive reimbursement for reasonable travelling, accommodation and other expenses incurred in travelling to or from meetings of the Board or committees, or when otherwise engaged on company business. We also provide directors with telecommunications and other services and equipment to assist them in performing their duties. From time to time, we may also make products and services available to directors without charge to allow them to familiarise themselves with our products and services and with recent technological developments.

To the extent any of these items are considered a personal benefit to a director, the value of the benefit is included in the “non-monetary benefits” column in Figure 24.

Name

Balance as at 2005

(a)($)

Increase in value to

25 October 05

(b)($)

Total value to25 October 05

(a) + (b)($)

Indexed increase in value to 30 June 06

(c) - (a)($)

Payment to director if he/she

had retired on30 June 2006 (1)

(c)($)

Donald G McGauchie 340,673 76,169 416,842 60,094 400,767

John E Fletcher 126,138 13,829 139,967 8,437 134,575 (2)

Belinda J Hutchinson 103,794 16,584 120,378 11,943 115,737

Catherine B Livingstone 143,074 18,059 161,133 11,849 154,923

Charles Macek 117,949 17,315 135,264 12,099 130,048

John W Stocker 342,176 27,273 369,449 13,026 355,202

116


Remuneration report

Details of non-executive directors’ remuneration

Figure 24 provides the details of all remuneration paid to our non-executive directors in fiscal 2006.

Figure 24: Non-executive directors – details of remuneration

(1) Includes fees for membership on Board committees. (2) Includes the value of the personal use of products and services.(3) These payments relate to eligible retirement benefits payable on cessation as Directors of Telstra.(4) Mr Ralph and Mr Clark retired as Directors of Telstra effective 11 August 2005.(5) Under current superannuation legislation Mr Ralph did not receive superannuation benefits as he had passed his 70th birthday.(6) Mr Fletcher resigned as a Director of Telstra on 30 June 2006.(7) Mr Willcox and Mr Zeglis were appointed Directors on 17 May 2006. Mr Zeglis is based in the United States.

There are no individual contracts for service with our non-executive directors other than as described above in relation to post-employment benefits.

Short term employee benefitsPost-employment

benefitsTermination

benefits

Equity settled

share-based payments

NameSalary and

Fees(1)

Non-monetary benefits(2)

OtherSuper-

annuationRetirement

benefitsTermination

benefits(3) Direct shareTotal

Donald G McGauchie Chairman

Ongoing 312,236 3,078 - 12,158 60,094 - 81,099 468,665

John T Ralph (4)

Deputy ChairmanRetired COB 11 Aug 2005

17,474 380 - (5) - 462,548 - 480,402

Anthony J Clark (4)

DirectorRetired COB 11 Aug 2005

9,015 458 - 970 - 278,846 - 289,289

John E Fletcher (6)

DirectorResigned

COB 30 June 2006

94,209 2,775 - 8,056 - 134,575 26,422 266,037

Belinda J HutchinsonDirector

Ongoing 100,611 2,288 - 18,551 11,943 - 29,740 163,133

Catherine LivingstoneDirector

Ongoing 113,063 2,288 - 10,998 11,849 - 31,015 169,213

Charles MacekDirector

Ongoing 123,032 2,748 - 11,227 12,099 - 33,565 182,671

John W StockerDirector

Ongoing 110,817 2,288 - 39,006 13,026 - 37,390 202,527

Peter Willcox (7)

DirectorCommenced 17 May 2006

11,872 - - 1,069 - - 3,235 16,176

John Zeglis (7)

DirectorCommenced 17 May 2006

12,941 - - - - - 3,235 16,176

Total 905,270 16,303 - 102,035 109,011 875,969 245,701 2,254,289


117

Telstra Corporation Limited and controlled entitiesAustralian Business Number (ABN): 33 051 775 556

Financial Report as at 30 June 2006

Page Number

Financial StatementsIncome Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119Statement of Recognised Income and Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120Statement of Cash Flows. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121

Notes to the Financial StatementsNote 1 - Basis of preparation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122Note 2 - Summary of accounting policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125Note 3 - Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142Note 4 - Dividends. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143Note 5 - Segment information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145Note 6 - Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152Note 7 - Profit from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154Note 8 - Remuneration of auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158Note 9 - Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159Note 10 - Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 162Note 11 - Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 163Note 12 - Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164Note 13 - Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165Note 14 - Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 166Note 15 - Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171Note 16 - Derivative financial assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176Note 17 - Trade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177Note 18 - Borrowings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178Note 19 - Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181Note 20 - Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184Note 21 - Share capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185Note 22 - Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187Note 23 - Retained profits and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189Note 24 - Notes to the statement of cash flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190Note 25 - Impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195Note 26 - Expenditure commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197Note 27 - Contingent liabilities and contingent assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200Note 28 - Post employment benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203Note 29 - Investments in controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211Note 30 - Investments in jointly controlled and associated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220Note 31 - Employee share plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226Note 32 - Key management personnel compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242Note 33 - Related party disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249Note 34 - Events after balance date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259Note 35 - Financial and capital risk management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260Note 36 - Adoption of International Financial Reporting Standards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276Note 37 - United States generally accepted accounting principles disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 297

Directors’ Declaration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319

Independent Audit Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320


118

The notes following the financial statements form part of the financial report.

Income Statementfor the year ended 30 June 2006

Telstra Group Telstra EntityYear ended 30 June Year ended 30 June

2006 2006 2005 2006 2005Note $m US$m $m $m $m

IncomeRevenue (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . 6 22,772 16,904 22,181 20,485 19,831Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 328 243 261 163 133

23,100 17,147 22,442 20,648 19,964ExpensesLabour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4,364 3,239 3,858 3,483 3,082Goods and services purchased . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4,730 3,511 4,211 3,305 2,958Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4,427 3,286 3,815 4,562 3,478

13,521 10,036 11,884 11,350 9,518

Share of net (gain)/loss from jointly controlledand associated entities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 (5) (4) 94 - -

13,516 10,032 11,978 11,350 9,518

Earnings before interest, income tax expense, depreciationand amortisation (EBITDA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,584 7,115 10,464 9,298 10,446Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4,087 3,034 3,529 3,657 3,206Earnings before interest and income tax expense (EBIT) . . . . . . . . . . . 5,497 4,081 6,935 5,641 7,240

Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 66 49 83 63 101Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1,002 744 963 985 943Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 936 695 880 922 842

Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . 4,561 3,386 6,055 4,719 6,398

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1,380 1,024 1,746 1,482 1,882

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 2,362 4,309 3,237 4,516

Earnings per share (cents per share) cents US cents centsBasic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 25.7 19.0 34.7Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 25.7 19.0 34.6

Total dividends declared (cents per share) . . . . . . . . . . . . . . . . . . . 4 34.0 25.0 40.0


119


Balance Sheetas at 30 June 2006

Telstra Group Telstra EntityAs at 30 June As at 30 June

2006 2006 2005 2006 2005Note $m US$m $m $m $m

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 689 511 1,548 474 1,368Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 3,701 2,747 3,549 3,344 3,538Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 224 166 232 175 194Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 21 16 4 21 4Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244 181 249 172 173Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,879 3,621 5,582 4,186 5,277Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 87 65 97 127 115Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 20 15 15 20 15Investments - accounted for using the equity method . . . . . . . . . . 13 23 17 48 18 41Investments - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 - - - 5,953 6,136Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . 14 23,622 17,535 22,891 21,765 21,223Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6,123 4,545 6,329 2,465 2,751Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1 1 2 - -Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 391 290 - 391 -Defined benefit assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 1,029 764 247 1,004 242Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,296 23,232 29,629 31,743 30,523Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,175 26,853 35,211 35,929 35,800

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3,570 2,650 2,807 3,065 1,956Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 1,969 1,462 1,507 3,374 3,892Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 318 534 400 519Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 737 547 421 679 356Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 20 12 9 11 12 11Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,170 868 1,132 919 912Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,886 5,854 6,412 8,449 7,646Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 197 146 250 65 61Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 11,409 8,469 10,941 11,376 10,907Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1,704 1,265 1,804 1,832 1,961Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 974 723 894 924 837Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . 20 768 570 864 768 864Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . 405 301 388 400 381Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,457 11,474 15,141 15,365 15,011Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,343 17,328 21,553 23,814 22,657Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832 9,525 13,658 12,115 13,143

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 5,569 4,134 5,536 5,569 5,536Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 (160) (119) (153) 210 194Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 7,177 5,327 8,273 6,336 7,413Equity available to Telstra Entity shareholders . . . . . . . . . . . . . . . . . 12,586 9,342 13,656 12,115 13,143Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 246 183 2 - -Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832 9,525 13,658 12,115 13,143


120


Statement of Recognised Income and Expensefor the year ended 30 June 2006


2006 2006 2005 2006 2005$m US$m $m $m $m

Foreign currency translation reserveEquity accounting our interest in jointly controlled and associated entities 1 1 (2) - -Translation of financial statements of non-Australian controlled entities (36) (27) (193) - -

Cash flow hedging reserveNet hedging gains recognised directly in equity . . . . . . . . . . . . . . . . 327 243 - 327 -Net hedging gains removed from equity and included in profit for the year (420) (312) - (421) -

General reserveEquity accounting our interest in jointly controlled and associated entities - - 5 - -

Retained profitsActuarial gain/(loss) on our defined benefit plans . . . . . . . . . . . . . . . 958 711 (90) 945 (85)

830 616 (280) 851 (85)Income tax on equity items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (256) (190) 24 (256) 24Net income/(expense) recognised directly in equity . . . . . . . . . . . . . . 574 426 (256) 595 (61)Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 2,362 4,309 3,237 4,516Total recognised income for the year . . . . . . . . . . . . . . . . . . . . . . . 3,755 2,788 4,053 3,832 4,455

Effects of changes in accounting policy attributable to Telstra Entity . . . 74 55 1,223 77 737


121


Statement of Cash Flowsfor the year ended 30 June 2006


2006 2006 2005 2006 2005Note $m US$m $m $m $m

Cash flows from operating activitiesReceipts from customers (inclusive of goods and services tax (GST)) . . . . 25,229 18,779 24,526 21,928 21,343Payments to suppliers and to employees (inclusive of GST) . . . . . . . . . (14,785) (11,026) (13,848) (11,754) (11,079)Net cash generated by operations . . . . . . . . . . . . . . . . . . . . . . . . . 10,444 7,753 10,678 10,174 10,264Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,882) (1,397) (1,718) (1,863) (1,712)Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 24 8,562 6,356 8,960 8,311 8,552

Cash flows from investing activitiesPayments for:- property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . (3,636) (2,699) (2,995) (3,483) (2,715)- intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (619) (459) (544) (502) (460)Capital expenditure (before investments) . . . . . . . . . . . . . . . . . . . . (4,255) (3,158) (3,539) (3,985) (3,175)- shares in controlled entities (net of cash acquired) . . . . . . . . . . . . 24 (43) (32) (573) (27) (28)- payments for other investments . . . . . . . . . . . . . . . . . . . . . . . . . (5) (4) (17) - (6)Total capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,303) (3,194) (4,129) (4,012) (3,209)Proceeds from:- sale of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . 50 37 68 72 79- sale of shares in controlled entities . . . . . . . . . . . . . . . . . . . . . . . 4 3 - - -- sale of other investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 66 176 89 164Net proceeds from CSL New World Mobility merger . . . . . . . . . . . . 24 42 31 - - -Issue of additional shares by controlled entities . . . . . . . . . . . . . . . . 6 4 - - -Redemption of PCCW converting note. . . . . . . . . . . . . . . . . . . . . . . - - 76 - 76Proceeds from share buy-back by jointly controlled and associated entities 34 25 - 34 -Loan to jointly controlled and associated entities . . . . . . . . . . . . . . . - - (37) - -Interest received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 49 78 63 79Dividends received. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 2 - 1Net cash used in investing activities. . . . . . . . . . . . . . . . . . . . . . . . (4,012) (2,979) (3,766) (3,754) (2,810)Operating cash flows less investing cash flows . . . . . . . . . . . . . . . . . 4,550 3,377 5,194 4,557 5,742

Cash flows from financing activitiesProceeds from borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,641 6,413 6,433 8,680 6,611Proceeds from Telstra bonds. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 983 - 983Repayment of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7,624) (5,659) (5,735) (7,703) (6,478)Repayment of Telstra bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . (517) (384) (272) (517) (272)Repayment of finance lease principal amounts . . . . . . . . . . . . . . . . (7) (5) (16) (6) (11)Staff repayments of share loans . . . . . . . . . . . . . . . . . . . . . . . . . . 24 18 19 24 19Purchase of shares for employee share plans . . . . . . . . . . . . . . . . 21 (6) (4) - (6) -Finance costs paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (940) (698) (879) (953) (892)Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (4,970) (3,689) (4,124) (4,970) (4,124)Share buy-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 - - (756) - (756)Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . (5,399) (4,008) (4,347) (5,451) (4,920)

Net increase/(decrease) in cash. . . . . . . . . . . . . . . . . . . . . . . . . . . (849) (631) 847 (894) 822Foreign currency translation on opening balances. . . . . . . . . . . . . . . 4 3 (3) - -Cash at the beginning of the year . . . . . . . . . . . . . . . . . . . . . . . . . 1,534 1,139 690 1,368 546Cash at the end of the year . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 689 511 1,534 474 1,368


122

Notes to the Financial Statements

In this financial report, we, us, our, Telstra and the Telstra Group - all mean Telstra Corporation Limited, an Australian corporation and its controlled entities as a whole. Telstra Entity is the legal entity, Telstra Corporation Limited.

Our financial or fiscal year ends on 30 June. Unless we state differently the following applies;

• year, fiscal year or financial year means the year ended 30 June;• balance date means the date 30 June; and• 2006 means fiscal 2006 and similarly for other fiscal years.

The financial report of the Telstra Group and the Telstra Entity for the year ended 30 June 2006 was authorised for issue in accordance with a resolution of the Telstra Board of Directors on 10 August 2006.

The principal accounting policies used in preparing the financial report of the Telstra Group and the Telstra Entity are listed in note 2 to our financial statements.

1.1 Basis of preparation of the financial report

This financial report is a general purpose financial report prepared in accordance with the requirements of the Australian Corporations Act 2001 and Accounting Standards applicable in Australia.

Both the functional and presentation currency of the Telstra Entity and its Australian controlled entities is Australian dollars. The functional currency of certain non Australian controlled entities is not Australian dollars. As a result, the results of these entities are translated to Australian dollars for presentation in the Telstra Group financial report.

This financial report is prepared in accordance with historical cost, except for some categories of investments, which are equity accounted and some financial assets and liabilities (including derivative instruments) which are recorded at fair value. Cost is the fair value of the consideration given in exchange for net assets acquired.

In preparing this financial report, we are required to make judgements and estimates that impact:

• income and expenses for the year;• the reported amounts of assets and liabilities; and• the disclosure of off balance sheet arrangements, including

contingent assets and contingent liabilities.

We continually evaluate our judgements and estimates. We base our judgements and estimates on historical experience, various other assumptions we believe to be reasonable under the circumstances and, where appropriate, practices adopted by international telecommunications companies.

Actual results may differ from our estimates in the event that the scenarios on which our judgements are based prove to be different.

1.2 Statement of compliance

This financial report complies with Accounting Standards applicable in Australia, which include Australian equivalents to International Financial Reporting Standards (A-IFRS). Compliance with A-IFRS ensures that the Telstra Group and Telstra Entity financial statements and notes comply with International Financial Reporting Standards (IFRS). The financial statements of Telstra Entity are considered separate financial statements.

This is our first full year financial report prepared in accordance with A-IFRS. AASB 1: “First time adoption of Australian equivalents to International Financial Reporting Standards” (AASB 1) has been applied in preparing this financial report. Our financial reports up to 30 June 2005 had been prepared in accordance with previous Australian Generally Accepted Accounting Principles (AGAAP). AGAAP differs in certain respects from A-IFRS.

When preparing this financial report we have amended certain accounting and valuation methods applied in the previous AGAAP financial statements to comply with A-IFRS. With the exception of financial instruments, the comparative figures were restated to reflect these adjustments. We have taken the exemption available under AASB 1 to only apply AASB 132: “Financial Instruments: Disclosure and Presentation” (AASB 132) and AASB 139: “Financial Instruments: Recognition and Measurement” (AASB 139), from 1 July 2005. In addition, we have elected to early adopt AASB 7: “Financial Instruments: Disclosures”, which supersedes the disclosure requirements of AASB 132.

Reconciliations and descriptions of the impact of the transition to A-IFRS on the Telstra Group and Telstra Entity’s income statement, balance sheet and statement of cash flow are provided in note 36.

1.3 Clarification of terminology used in our income statement

Under the requirements of AASB 101: “Presentation of Financial Statements”, we must classify all of our expenses (apart from any finance costs and our share of net (gain)/loss from jointly controlled and associated entities) according to either the nature (type) of the expense or the function (activity to which the expense relates). We have chosen to classify our expenses using the nature classification as it more accurately reflects the type of operations we undertake.

1. Basis of preparation


123

Notes to the Financial Statements (continued)

1.3 Clarification of terminology used in our income statement (continued)

Earnings before interest, income tax expense, depreciation and amortisation (EBITDA) reflects our profit for the year prior to including the effect of net finance costs, income taxes, depreciation and amortisation. We believe that EBITDA is a relevant and useful financial measure used by management to measure the company’s operating profit.

Our management uses EBITDA, in combination with other financial measures, primarily to evaluate the company’s operating performance before financing costs, income tax and non-cash capital related expenses. In consideration of the capital intensive nature of our business, EBITDA is a useful supplement to net income in understanding cash flows generated from operations that are available for payment of income taxes, debt service and capital expenditure.

In addition, we believe EBITDA is useful to investors because analysts and other members of the investment community largely view EBITDA as a key and widely recognised measure of operating performance.

Earnings before interest and income tax expense (EBIT) is a similar measure to EBITDA, but takes into account the effect of depreciation and amortisation.

When a specific item from continuing operations is of such a size, nature or incidence that its disclosure is relevant in explaining our operating performance for the reporting period, its nature and amount is disclosed separately in note 7(b).

1.4 Adoption of accounting standards before their application date

Certain new accounting standards and Urgent Issues Group (UIG) interpretations have been issued with an application date after the year ended 30 June 2006. As a result, these accounting standards and UIG interpretations are not mandatory for adoption in our financial report for the year ended 30 June 2006.

Under subsection 334(5) of the Corporations Act 2001, we elected to early adopt the following accounting standards before the application date:

• AASB 119: “Employee Benefits (issued December 2004)”(AASB 119); and

• AASB 7: “Financial Instruments: Disclosures” (AASB 7).

Due to the early adoption of the revised AASB 119, we also elected to adopt the related omnibus accounting standard, AASB 2005-3: “Amendments to Australian Accounting Standards”. Our comparatives for the year ended 30 June 2005 were fully restated for these accounting standards in accordance with AASB 1.

Due to the early adoption of AASB 7, we also elected to adopt the related omnibus accounting standard, AASB 2005-10: “Amendments to Australian Accounting Standards”. We have taken the exemption available under AASB 1 to only apply these standards from 1 July 2005.

1.5 United States generally accepted accounting principles (USGAAP)

This financial report combines the disclosure requirements for both A-IFRS and United States Generally Accepted Accounting Principles (USGAAP). Note 37 contains a reconciliation of the major differences between our financial report prepared under A-IFRS and USGAAP.

This financial report has been prepared using our presentation currency, Australian dollars (A$). For the convenience of readers outside Australia we have converted our financial statements and USGAAP disclosures from A$ to US$ for fiscal 2006.

These conversions appear under columns headed “US$m” and represent rounded millions of US dollars. The conversion has been made using the noon buying rate in New York City for cable transfers in non-US currencies. This rate is certified for custom purposes by the Federal Reserve Bank of New York. The rate on 30 June 2006 was A$1.00 = US$0.7423.

These conversions are indicative only and do not mean that the A$ amounts could be converted to US$ at the rate indicated.

1.6 Recently issued accounting standards to be applied in Australia in future reporting periods

The accounting standards and UIG interpretation that have not been early adopted for the year ended 30 June 2006, but will be applicable to the Telstra Group and Telstra Entity in future reporting periods are detailed below. Apart from these standards, we have considered other accounting standards that will be applicable in future periods, however they have been considered insignificant to Telstra.

1. Basis of preparation (continued)


124


1.6 Recently issued accounting standards to be applied in Australia in future reporting periods (continued)

Lease arrangements

UIG 4: “Determining Whether an Arrangement Contains a Lease” (UIG 4) is applicable to annual reporting periods beginning on or after1 January 2006. We will apply this interpretation in our financial report for the half-year ended 31 December 2006. A related omnibus standard AASB 2005-5: “Amendments to Australian Accounting Standards” will also be adopted for the half-year ended 31 December 2006.

UIG 4 requires entities to assess whether the arrangements they enter into contain leases. An arrangement contains a lease if fulfilment of the arrangement is dependent on the use of specific assets and it conveys a right to use those assets to the customer. The lease component of the arrangement is then separated and accounted for as either a finance or operating lease depending on the nature of the arrangement. Under our current accounting policy we do not separately account for leases that are embedded within our service agreements.

UIG 4 will align our accounting under A-IFRS to our policy adopted under USGAAP (refer to note 37(p)). However, our USGAAP policy is only applied to arrangements that were entered into or modified after 1 July 2003. UIG 4 is applicable to all arrangements in existence as of the transition date.

Financial guarantees

AASB 2005-9: “Amendments to Australian Accounting Standards” is applicable to annual reporting periods beginning on or after1 January 2006. We will apply this interpretation in our financial report for the half-year ended 31 December 2006.

These amendments require that liabilities arising from the issue of financial guarantee contracts be recognised on the balance sheet. Management has not yet determined the effect the adoption of these amendments will have on our balance sheet, income statement or statement of cashflows.

1.7 Rounding

All dollar amounts in this financial report (except where indicated) have been rounded to the nearest million dollars ($m) for presentation. This has been done in accordance with Australian Securities and Investments Commission (ASIC) Class Order 98/100, dated 10 July 1998, issued under section 341(1) of the Corporations Act 2001.

1. Basis of preparation (continued)


125


2.1 Change in accounting policies

The following accounting policy changes occurred during fiscal 2006:

The transition to Australian equivalents to International Financial Reporting Standards (A-IFRS) resulted in changes to a number of our accounting policies. The accounting policies set out below have been applied in preparing the financial report for the year ended 30 June 2006, the comparative information presented in these financial statements and in the preparation of the opening A-IFRS balance sheet as at 1 July 2004, except for the accounting policies in respect of financial instruments.

Reconciliations and descriptions of the impact of the transition toA-IFRS on the Telstra Group and Telstra Entity’s income statement, balance sheet and statement of cash flow are provided in note 36.

There were no accounting policy changes during fiscal 2005.

Accounting policies

2.2 Principles of consolidation

The consolidated financial report includes the assets and liabilities of the Telstra Entity and its controlled entities as a whole as at the end of the year and the consolidated results and cash flows for the year. The effect of all intergroup transactions and balances are eliminated in full from our consolidated financial statements.

Where we do not control an entity for the entire year, results and cash flows for those entities are only included from the date on which control commences, or up until the date on which there is a loss of control.

Our consolidated retained profits include retained profits/accumulated losses of controlled entities from the time they became a controlled entity until control ceases. Minority interests in the results and equity of controlled entities are shown separately in our consolidated income statement and consolidated balance sheet.

The financial statements of controlled entities are prepared for the same reporting period as the Telstra Entity, using consistent accounting policies. Adjustments are made to bring into line any dissimilar accounting policies.

An entity is considered to be a controlled entity where we are able to dominate decision making, directly or indirectly, relating to the financial and operating policies of that entity so as to obtain benefits from its activities.

We account for the acquisition of our controlled entities using the purchase method of accounting. This involves recognising the acquiree’s identifiable assets, liabilities and contingent liabilities at their fair value at the date of acquisition. Any excess of the cost of acquisition over our interest in the fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities is recognised as goodwill.

2.3 Foreign currency translation

(a) Transactions and balances

Foreign currency transactions are converted into the relevant functional currency at market exchange rates applicable at the date of the transactions. Amounts payable or receivable in foreign currencies at balance date are converted into the relevant functional currency at market exchange rates at balance date. Any currency translation gains and losses that arise are included in our profit or loss for the year. Where we enter into a hedge for a specific expenditure commitment or for the construction of an asset, hedging gains and losses are accumulated in equity over the period of the hedge and are transferred to the carrying value of the asset upon completion, or included in the income statement at the same time as the discharge of the expenditure commitment.

(b) Translation of financial reports of foreign operations that have a functional currency that is not Australian dollars.

The consolidated financial statements are presented in Australian dollars, which is the functional and presentation currency of Telstra Corporation Limited.

Our operations include subsidiaries, associates, and jointly controlled entities, the activities and operations of which are in an economic environment where the functional currency is not Australian dollars. The financial statements of these entities are translated to Australian dollars (our presentation currency) using the following method:

• assets and liabilities are translated into Australian dollars using market exchange rates at balance date;

• equity at the date of investment is translated into Australian dollars at the exchange rate current at that date. Movements post-acquisition (other than retained profits/ accumulated losses) are translated at the exchange rates current at the dates of those movements;

• income statements are translated into Australian dollars at average exchange rates for the year, unless there are significant identifiable transactions, which are translated at the exchange rate that existed on the date of the transaction; and

• currency translation gains and losses are recorded in the foreign currency translation reserve.

2. Summary of accounting policies


126


2.3 Foreign currency translation (continued)

Exchange differences relating to foreign currency monetary items forming part of the net investment in our entities operating in an economic environment where the functional currency is not Australian dollars, together with related tax effects, are eliminated against the foreign currency translation reserve in our consolidated financial statements.

Where we hedge our investment in entities which are in an economic environment where the functional currency is not Australian dollars, the gains or losses on the hedging instrument are recognised in the foreign currency translation reserve until we dispose of the operation, at which time the cumulative gains and losses are transferred to the income statement.

Upon disposal or partial disposal of a foreign operation, the balance of the foreign currency translation reserve relating to the entity, or the part disposed of, is transferred to the income statement and becomes part of the gain or loss on sale.

2.4 Cash and cash equivalents

Cash includes cash at bank and on hand, bank deposits, bills of exchange and commercial paper with an original maturity date not greater than three months.

Bank deposits are recorded at amounts to be received.

Bills of exchange and commercial paper are classified as ‘available-for-sale’ financial assets and are therefore held at fair value. The carrying amount of these assets approximates their fair value due to the short term to maturity.

The statement of cash flow discloses cash net of outstanding bank overdrafts where applicable.

2.5 Trade and other receivables

Telstra has elected to apply the option available under AASB 1: "First-time Adoption of Australian Equivalents to International Financial Reporting Standards" (AASB 1) of adopting AASB 132: "Financial Instruments: Disclosure and Presentation" (AASB 132) and AASB 139: "Financial Instruments: Recognition and Measurement" (AASB 139) from 1 July 2005. Outlined below are the relevant accounting policies for trade and other receivables applicable for the years ending 30 June 2006 and 30 June 2005.

Trade debtors and other receivables are initially recorded at the fair value of the amounts to be received and are subsequently measured at amortised cost.

An allowance for doubtful debts is raised based on a review of outstanding amounts at balance date. Bad debts specifically provided for in previous years are eliminated against the allowance for doubtful debts. In all other cases, bad debts are written off as an expense directly in the income statement.

2.6 Inventories

Our finished goods include goods available for sale, and material and spare parts to be used in constructing and maintaining the telecommunications network. We value inventories at the lower of cost and net realisable value.

We allocate cost to the majority of inventory items on hand at balance date using the weighted average cost basis. For the remaining quantities on hand, actual cost is used where the item was purchased for use in a particular asset or project, and the ‘first in first out’ basis is used for materials purchased for production of directories.

Net realisable value of items expected to be sold is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs incurred in marketing, selling and distribution. It approximates fair value less costs to sell.

Net realisable value of items expected to be consumed, for example used in the construction of another asset, is the net value expected to be earned through future use.

2.7 Construction contracts

(a) Valuation

We record construction contracts in progress at cost (including any profits recognised) less progress billings and any provision for foreseeable losses.

Cost includes:

• both variable and fixed costs directly related to specific contracts;• amounts which can be allocated to contract activity in general and

which can be allocated to specific contracts on a reasonable basis; and

• costs expected to be incurred under penalty clauses, warranty provisions and other variances.

Where a significant loss is estimated to be made on completion, a provision for foreseeable losses is brought to account and recorded against the gross amount of construction work in progress.

2. Summary of accounting policies (continued)


127


2.7 Construction contracts (continued)

(b) Recognition of profit

Profit is recognised on an individual project basis using the percentage of completion method. The percentage of completion is calculated based on estimated costs of completion, refer to note 2.18(d) for further details.

Profits are recognised when:

• the stage of contract completion can be reliably determined;• costs to date can be clearly identified; and• total contract revenues to be received and costs to complete can be

reliably estimated.

(c) Disclosure

The construction work in progress balance is recorded in current inventories after deducting progress billings. Where progress billings exceed the balance of construction work in progress, the net amount is shown as a current liability within trade and other payables.

2.8 Assets classified as held for sale

Non current assets are classified as held for sale if the carrying amount is to be recovered principally through a sale transaction, rather than through continuing use. We only classify an asset as held for sale if it is available for immediate sale in its present condition subject to only usual and customary terms, and its sale is highly probable.

We record held for sale assets at the lower of the carrying amount and fair value less costs to sell. An impairment loss is recognised for any initial or subsequent write down of the assets to fair value less costs to sell. We do not depreciate or amortise these assets while they are classified as held for sale.

2.9 Investments

(a) Controlled entities

Investments in controlled entities are recorded at cost less impairment of the investment value.

Where we hedge the value of our investment in an overseas controlled entity, the hedge is accounted for in accordance with note 2.26.

(b) Jointly controlled and associated entities

(i) Jointly controlled entities

A jointly controlled entity is a contractual arrangement (in the form of an entity) whereby two or more parties take on an economic activity which is governed by joint control. Joint control involves the contractually agreed sharing of control over an entity where two or more parties must consent to all major decisions. Our interests in jointly controlled entities, including partnerships, are accounted for using the equity method of accounting in the Telstra Group financial statements and the cost method in the Telstra Entity financial statements.

Under the equity method of accounting, we adjust the initial recorded amount of the investment for our share of:

• profits or losses for the year after tax since the date of investment;• reserve movements since the date of investment;• unrealised profits or losses;• dividends or distributions received; and• deferred profit brought to account.

Our share of all of these items, apart from dividends or distributions received and reserves, is recorded in the income statement.

Where the equity accounted amount of our investment in an entity falls below zero, we suspend the equity method of accounting and record the investment at zero. When this occurs, the equity method of accounting does not recommence until our share of profits and reserves exceeds the cumulative prior years share of losses and reserve reductions.

Where we have long term assets that in substance form part of our investment in equity accounted interests and the equity accounted amount of investment falls below zero, we reduce the value of the assets in proportion with our cumulative losses.

(ii) Associated entities

Where we hold an interest in the equity of an entity, generally of between 20% and 50%, and are able to apply significant influence to the decisions of the entity, that entity is an associated entity. Associated entities are accounted for using the equity method of accounting in the Telstra Group financial statements and the cost method in the Telstra Entity financial statements.



128


2.9 Investments (continued)

(c) Jointly controlled assets

A jointly controlled asset involves the joint control of one or more assets acquired and dedicated for the purpose of a joint venture. The assets are used to obtain benefits for the venturers. Where the asset is significant we record our share of the asset. We record expenses based on our percentage ownership interest of the jointly controlled asset.

(d) Listed securities and investments in other corporations

We have elected to apply the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. Accordingly, we have applied previous AGAAP in the comparative information on financial instruments within the scope of AASB 132 and AASB 139.

Our investments in listed securities and in other corporations are classified as ‘available-for-sale’ financial assets and as such are measured at fair value at each reporting date.

Net fair values of our investments are calculated on the following bases:

• for listed securities traded in an organised financial market, we use the current quoted market bid price at balance date; and

• for investments in unlisted entities whose securities are not traded in an organised financial market, we establish fair value by using valuation techniques, including reference to discounted cash flows and fair values of recent arms length transactions involving the same instruments or other instruments that are substantially the same.

We remeasure the fair value of our investments in listed securities and other corporations at each reporting date. Any gains or losses are recognised in equity until we dispose of the investment, or we determine it to be impaired, at which time we transfer all cumulative gains and losses to the income statement.

2.10 Impairment

(a) Non-financial assets

Our tangible and intangible assets (excluding inventories, assets arising from construction contracts, deferred tax assets, defined benefit assets and financial assets) are measured using the cost basis and are written down to recoverable amount where their carrying value exceeds recoverable amount.

Assets with an indefinite useful life are not subject to amortisation and are tested on an annual basis for impairment, or where an indication of impairment exists. Assets that are subject to amortisation are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable.

The recoverable amount of an asset is the higher of its fair value less costs to sell or its value in use. Value in use represents the present value of the future amount expected to be recovered through the cash inflows and outflows arising from the asset’s continued use and subsequent disposal. We recognise any decrement in the carrying value as an expense in the income statement in the reporting period in which the impairment loss occurs.

In determining value in use, we apply management judgement in establishing forecasts of future operating performance, as well as the selection of growth rates, terminal rates and discount rates. These judgements are applied based on our understanding of historical information and expectations of future performance.

The expected net cash flows included in determining recoverable amounts of our assets are discounted to present values using a market determined, risk adjusted, discount rate. When determining an appropriate discount rate, we use the weighted average cost of capital (WACC) as an initial point of reference, adjusted for specific risks associated with each different category of assets assessed.

For assets that do not generate largely independent cash inflows, the recoverable amount is determined for the cash generating unit to which that asset belongs. Our cash generating units (CGUs) are determined according to the lowest level of aggregation for which an active market exists and the assets involved create largely independent cash inflows.

We apply management judgement to establish our CGUs. We have determined that assets which form part of our ubiquitous telecommunications network work together to generate net cash flows. No one item of telecommunications equipment is of any value without the other assets to which it is connected in order to achieve the delivery of products and services. As a result, we have determined that the ubiquitous telecommunications network is a single CGU. We have referred to this CGU as the Telstra Entity CGU in our financial report.

The Telstra Entity CGU excludes the hybrid fibre coaxial (HFC) cable network, which we consider not to be integrated with the rest of our telecommunications network.



129


2.10 Impairment (continued)

(b) Financial assets

The group has elected to apply the option available under AASB 1 of adopting AASB 132 and AASB 139 from 1 July 2005. Outlined below are the relevant accounting policies applicable for the years ending30 June 2005 and 30 June 2006.

At each reporting date we assess whether there is objective evidence to suggest that any of our financial assets are impaired.

For financial assets held at fair value, we consider the financial asset to be impaired when there has been an extended period in which the fair value of the financial asset has been below the acquisition cost and the decline in fair value is not expected to be recovered. At this time, all revaluation losses in relation to the impaired financial asset that have been accumulated within equity are recognised in the income statement.

For financial assets held at cost or amortised cost, we consider the financial asset to be impaired when there is a difference between the carrying value and the present value of estimated discounted future cash flows. Any impairment losses are recognised immediately in the income statement.

Impairment losses recognised in the income statement are not reversed in relation to investment securities.

2.11 Property, plant and equipment

(a) Acquisition

Items of property, plant and equipment are recorded at cost and depreciated as described in note 2.11(b). The cost of our constructed property, plant and equipment includes:

• the cost of material and direct labour;• an appropriate proportion of direct and indirect overheads; and• where we have an obligation for removal of the asset or restoration

of the site, an estimate of the cost of restoration or removal if that cost can be reliably estimated.

Where settlement of any part of the cash consideration is deferred, the amounts payable in the future are discounted to their present value as at the date of acquisition. The unwinding of this discount is recorded within finance costs.

(b) Depreciation

Items of property, plant and equipment, including buildings and leasehold property, but excluding freehold land, are depreciated on a straight line basis to the income statement over their estimated service lives. We start depreciating assets when they are installed and ready for use.

The service lives of our significant items of property, plant and equipment are as follows:

The service lives and residual value of our assets are reviewed each year. We apply management judgment in determining the service lives of our assets. This assessment includes a comparison with international trends for telecommunication companies, and in relation to communication assets, includes a determination of when the asset may be superseded technologically or made obsolete.


Telstra GroupAs at 30 June

2006 2005

Property, plant and equipmentService life

(years)Service life

(years)

Buildings - building shell . . . . . . . . . . . 55 55 - general purpose . . . . . . . . 8 - 40 8 - 40 - fitout. . . . . . . . . . . . . . . 10 - 20 10 - 20

Communication assetsBuildings - building shell . . . . . . . . . 55 55

- network . . . . . . . . . . . . . 8 - 40 8 - 40 - fitout. . . . . . . . . . . . . . . 10 - 20 10 - 20

Customer premises equipment . . . . . . 3 - 8 3 - 8Transmission equipment . . . . . . . . . 2 - 25 3 - 25Switching equipment. . . . . . . . . . . . 4 - 12 1 - 10Mobile equipment. . . . . . . . . . . . . . 2 - 10 3 - 10Cables . . . . . . . . . . . . . . . . . . . . . 5 - 25 8 - 25Ducts and pipes - main cables . . . . . . 40 40

- distribution . . . . . . . 30 30Other communications plant . . . . . . . 1 - 30 3 - 16

Other assetsLeasehold plant and equipment . . . . . 3 - 15 3 - 15Other plant, equipment and motor vehicles . . . . . . . . . . . . . . . . . . . . 3 - 15 3 - 15


130


2.11 Property, plant and equipment (continued)

We account for our assets individually where it is practical and feasible and in line with commercial practice. Where it is not practical and feasible, we account for assets in groups. Group assets are automatically removed from our financial statements on reaching the group life. Therefore, any individual asset may be physically retired before or after the group life is attained. This is the case for certain communication assets as we assess our technologies to be replaced by a certain date.

As part of our review, service lives of our assets are reassessed. Any reassessment in a particular year will affect the depreciation expense (either increasing or decreasing) through to the end of the reassessed useful life for both that current year and future years. The net effect of the reassessment for fiscal 2006 was an increase in our depreciation expense of $66 million (2005: $60 million decrease) for both the Telstra Group and Telstra Entity. This reassessment includes the adjustment arising from our transformation resulting from the strategic review undertaken, refer to note 7(b) for further information.

Our major repairs and maintenance expenses relate to maintaining our exchange equipment and the customer access network. We charge the cost of repairs and maintenance, including the cost of replacing minor items, which are not substantial improvements, to operating expenses.

2.12 Leased plant and equipment

We account for leases in accordance with AASB 117: “Leases”. We distinguish between finance leases, which effectively transfer substantially all the risks and benefits incidental to ownership of the leased asset from the lessor to the lessee, from operating leases under which the lessor effectively retains all such risks and benefits.

Where we acquire non current assets via a finance lease, the lower of the fair value of the asset and the present value of future minimum lease payments is capitalised as equipment under finance lease at the beginning of the lease term. Capitalised lease assets are depreciated on a straight line basis over the shorter of the lease term or the expected useful life of the assets. A corresponding liability is also established and each lease payment is allocated between the liability and finance charges.

Operating lease payments are charged to the income statement on a straight line basis over the term of the lease.

Where we lease properties, costs of improvements to these properties are capitalised as leasehold improvements and amortised over the shorter of the useful life of the improvements or the term of the lease.

2.13 Intangible assets

Intangible assets are assets that have value, but do not have physical substance. In order to be recognised, an intangible asset must be either separable or arise from contractual or other legal rights.

(a) Goodwill

On the acquisition of investments in controlled entities, jointly controlled and associated entities, when we pay an amount greater than the fair value of the net identifiable assets of the entity, this excess is recognised as goodwill in the Telstra Group balance sheet. We calculate the amount of goodwill as at the date of purchasing our ownership interest in the entity.

When we purchase an entity that we will control, the amount of goodwill is recorded in intangible assets. When we acquire a jointly controlled or associated entity, the goodwill amount is included as part of the cost of the investment.

Goodwill is not amortised but is tested for impairment in accordance with note 2.10 on an annual basis and when an indication of impairment exists.

(b) Internally generated intangible assets

Research costs are recorded as an expense as incurred. Development costs are capitalised if the project is technically and commercially feasible and we have sufficient resources to complete the development.

Software assets

We record direct costs associated with the development of business software for internal use as software assets if the development costs satisfy the criteria for capitalisation described above.

Costs included in software assets developed for internal use are:

• external direct costs of materials and services consumed; and• payroll and direct payroll-related costs for employees (including

contractors) directly associated with the project.

Software assets developed for internal use have a finite life and are amortised on a straight line basis over their useful lives to us. Amortisation commences once the software is ready for use.



131


2.13 Intangible assets (continued)

(c) Acquired intangible assets

We acquire other intangible assets either as part of a business combination or through separate acquisition. Intangible assets acquired in a business combination are recorded at their fair value at the date of acquisition and recognised separately from goodwill.On initial acquisition, we apply management judgement to determine the appropriate allocation of purchase consideration to the assets being acquired, including goodwill and identifiable intangible assets.

Intangible assets that are considered to have a finite life are amortised on a straight line basis over the period of expected benefit. Intangible assets that are considered to have an indefinite life are not amortised but tested for impairment in accordance with note 2.10 on an annual basis, or where an indication of impairment exists.

Our acquired intangible assets include mastheads, patents, trademarks, licences, brandnames and customer bases.

(d) Deferred expenditure

Deferred expenditure mainly includes costs incurred for basic access installations and connections fees for in place and new services, and direct incremental costs of establishing a customer contract.

Significant items of expenditure are deferred to the extent that they are recoverable from future revenue and will contribute to our future earning capacity. Any costs in excess of future revenue are recognised immediately in the income statement.

We amortise deferred expenditure over the average period in which the related benefits are expected to be realised.

Handset subsidies are expensed as incurred. On transition to A-IFRS we elected to expense handset subsidies, which was a change from the previous policy whereby the cost of the subsidy was deferred and written off over the average contract term.

(e) Amortisation

The average amortisation periods of our identifiable intangible assets

are as follows:

The service lives of our identifiable intangible assets are reviewed each year. Any reassessment of service lives in a particular year will affect the amortisation expense (either increasing or decreasing) through to the end of the reassessed useful life for both that current year and future years. The net effect of the reassessment for fiscal 2006 was an increase in our amortisation expense of $160 million (2005: $nil) for the Telstra Group and $145 million (2005: $nil) for the Telstra Entity. This reassessment includes the adjustment arising from our transformation resulting from the strategic review undertaken, refer to note 7(b) for further information.

In relation to acquired intangible assets, we apply management judgement to determine the amortisation period based on the expected useful lives of the respective assets. In some cases, the useful lives of certain acquired intangible assets are supported by external valuation advice on acquisition. In addition, we apply management judgement to assess annually, the indefinite useful life assumption applied to certain acquired intangible assets.

2.14 Trade and other payables

Trade and other payables, including accruals, are recorded when we are required to make future payments as a result of a purchase of assets or services.



2006 2005

Identifiable intangible assets

Expected benefit(years)

Expected benefit(years)

Software assets . . . . . . . . . . . . . . . 6 6Patent and trademarks . . . . . . . . . . . . 19 19Licences . . . . . . . . . . . . . . . . . . . . 12 11Brandnames . . . . . . . . . . . . . . . . . 19 20Customer bases . . . . . . . . . . . . . . . 11 13Deferred expenditure . . . . . . . . . . . . 4 4


132


2.15 Borrowings

Our borrowings fall into two categories:

(a) Borrowings in a designated hedging relationship

Our offshore borrowings which are designated as hedged items are subject to either fair value or cash flow hedges. The method by which they are hedged determines their accounting treatment.

Borrowings subject to fair value hedges are recognised initially at fair value. The carrying amount of our borrowings in fair value hedges(to hedge against changes in value due to interest rate or currency movements) is adjusted for fair value movements attributable to the hedged risk. Fair value is calculated using valuation techniques which utilise data from observable markets. Assumptions are based on market conditions existing at each balance date. The fair value is calculated as the present value of the estimated future cash flows using an appropriate market based yield curve which is independently derived and representative of Telstra’s cost of borrowing. These borrowings are remeasured each reporting period and the gains or losses are recognised in the income statement along with the associated gains or losses on the hedging instrument.

Borrowings subject to cash flow hedges (to hedge against currency movements) are recognised initially at fair value based on the applicable spot price plus any transaction costs that are directly attributable to the issue of the borrowing. These borrowings are subsequently carried at amortised cost, translated at the applicable spot exchange rate at reporting date. Any difference between the final amount paid to discharge the borrowing and the initial borrowing proceeds is recognised in the income statement over the borrowing period using the effective interest method. The effective interest method is a method of calculating the amortised cost of a financial liability and of allocating the interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments through the expected life of the financial liability, or, where appropriate, a shorter period.

Currency gains or losses on the borrowings are recognised in the income statement, along with the associated gains or losses on the hedging instrument, which have been transferred from the cash flow hedging reserve to the income statement.

(b) Borrowings not in a designated hedging relationship

Borrowings not in a designated hedging relationship include commercial paper borrowings, Telstra Bonds, loans from associates, unsecured promissory notes and other borrowings.

All such instruments are initially recognised at fair value plus any transaction costs that are directly attributable to the issue of the instrument and are subsequently measured at amortised cost. Any difference between the final amount paid to discharge the borrowing and the initial borrowing proceeds (including transaction costs) is recognised in the income statement over the borrowing period using the effective interest method.

Borrowings are included as non current liabilities except for those with maturities less than twelve months from the balance sheet date, which are classified as current liabilities.

2.16 Provisions

Provisions are recognised when the group has:

• a present legal or constructive obligation to make a future sacrifice of economic benefits as a result of past transactions or events;

• it is probable that a future sacrifice of economic benefits will arise; and

• a reliable estimate can be made of the amount of the obligation.

The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at reporting date, taking into account the risks and uncertainties surrounding the obligation. Where a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows.

(a) Employee benefits

We accrue liabilities for employee benefits to wages and salaries, annual leave and other current employee benefits at their nominal amounts. These are calculated based on remuneration rates expected to be current at the date of settlement and include related on costs.

Certain employees who have been employed by Telstra for at least ten years are entitled to long service leave of three months (or more depending on the actual length of employment), which is included in our employee benefits provision.

We accrue liabilities for other employee benefits not expected to be paid or settled within 12 months of balance date, including long service leave, at the present values of future amounts expected to be paid. This is based on projected increases in wage and salary rates over an average of 10 years, experience of employee departures and periods of service.



133


2.16 Provisions (continued)

We calculate present values using rates based on government guaranteed securities with similar due dates to our liabilities.

We apply management judgment in estimating the following key assumptions used in the calculation of our long service leave provision at reporting date:

• weighted average projected increases in salaries;• weighted average discount rate; and• leave taking rate.

Refer to note 19 for further details on the key management judgements used in the calculation of our long service leave provision.

(b) Workers’ compensation

We self insure our workers’ compensation liabilities. We take up a provision for the present value of these estimated liabilities, based on an actuarial review of the liability. This review includes assessing actual accidents and estimating claims incurred but not reported. Present values are calculated using appropriate rates based on the risks specific to the liability with similar due dates.

Certain controlled entities do not self insure, but pay annual premiums to third party insurance companies for their workers’ compensation liabilities.

(c) Restoration costs

We provide for costs of restoration or removal in relation to our fixed assets when we have a legal or constructive obligation. These costs include our obligations relating to the dismantling, removal, remediation, restoration and other expenditure associated with our fixed assets or site fitouts. Restoration provisions are initially recorded when a reliable estimate of the costs to be incurred can be determined, discounted to present value. Our estimates are based upon a review of lease contracts, legal requirements, historical information and expected future costs. Any changes to these estimates are adjusted on a progressive basis as required.

Where restoration costs are incurred due to the acquisition, construction or development of a non current asset, the provision is raised and recorded at that time as part of the cost of the asset where the cost is reliably measurable.

(d) Redundancy and restructuring costs

We recognise a provision for redundancy costs when a detailed formal plan for the redundancies has been developed and a valid expectation has been created that the redundancies will be carried out with those employees likely to be affected.

We recognise a provision for restructuring when a detailed formal plan has been approved and we have raised a valid expectation in those affected by the restructuring that the restructuring will be carried out.

2.17 Share capital

Issued and paid up capital is recognised at the fair value of the consideration received by the Company.

Any transaction costs arising on the issue of ordinary shares are recognised directly in equity, net of tax, as a reduction of the share proceeds received.

Where we undertake a share buy-back, contributed equity is reduced in accordance with the structure of the buy-back arrangement. Costs associated with the buy-back, net of tax, are also deducted from contributed equity. We also record the purchase of Telstra Entity shares by our employee share plan trusts as a reduction in share capital.

Share based remuneration associated with our employee share plans is recognised as additional share capital. Non-recourse loans provided to employees to participate in these employee share plans are recorded as a reduction in share capital.

Refer to note 2.25 for further details regarding our accounting for employee share plans.

2.18 Revenue recognition

The underlying accounting principles of revenue recognition are generally the same for both A-IFRS and the United States Generally Accepted Accounting Principles (USGAAP). As such we have applied the more detailed guidance under USGAAP to the timing of revenue recognition for both A-IFRS and USGAAP financial statements where there is no conflict between the two.

Sales revenue

Our categories of sales revenue are recorded after deducting sales returns, trade allowances, duties and taxes.

(a) Rendering of services

Revenue from the provision of our telecommunications services includes telephone calls and other services and facilities provided, such as internet and data.



134


2.18 Revenue (continued)

We record revenue earned from:

• telephone calls on completion of the call; and• other services generally at completion, or on a straight line basis

over the period of service provided, unless another method better represents the stage of completion.

Installation and connection fee revenues are deferred and recognised over the average estimated customer life. Incremental costs directly related to these revenues are also deferred and amortised over the customer contract life. Also refer to note 2.13(d).

In relation to basic access installation and connection revenue, we apply our management judgement to determine the estimated customer contract life. Based on our reviews of historical information and customer trends, we have determined that our average estimated customer life is 5 years (2005: 5 years). As a result, basic access installation and connection revenue is recognised over this period.

(b) Sale of goods

Our revenue from the sale of goods includes revenue from the sale of customer equipment and similar goods. This revenue is recorded on delivery of the goods sold.

Generally we record the full gross amount of sales proceeds as revenue, however if we are acting as an agent under a sales arrangement, we record the revenue on a net basis, being the gross amount billed less the amount paid to the supplier. We review the facts and circumstances of each sales arrangement to determine if we are an agent or principal under the sale arrangement.

(c) Rent of network facilities

We earn rent mainly from access to retail and wholesale fixed and mobile networks and from the rent of dedicated lines, customer equipment, property, plant and equipment and other facilities.The revenue of providing access to the network is recorded on an accrual basis over the rental period.

(d) Construction contracts

We record construction revenue on a percentage of contract completion basis. The percentage of completion of contracts is calculated based on estimated costs to complete the contract.

Our construction contracts are classified according to their type. There are three types of construction contracts, these being material intensive, labour intensive and short duration. Revenue is recognised on a percentage of completion basis using the appropriate measures as follows:

• (actual costs / planned costs) x planned revenue - for material intensive projects;

• (actual labour hours / planned labour hours) x planned revenue - for labour intensive projects; and

• short duration projects are those that are expected to be completed within a month and revenues and costs are recognised on completion.

(e) Advertising and directory services

Classified advertisements and display advertisements are published on a daily, weekly and monthly basis for which revenues are recognised at the time the advertisement is published.

All of our Yellow Pages® and White Pages® directory revenues are recognised on delivery of the published directories using the delivery method. We consider our directories delivered when they have been published and delivered to customers’ premises. Revenue from online directories is recognised over the life of service agreements, which is on average one year. Voice directory revenues are recognised at the time of providing the service to customers.

(f) Royalties

Royalty revenue is recognised on an accrual basis in accordance with the substance of the relevant agreements.

(g) Interest revenue

We record interest revenue on an accruals basis. For financial assets, interest revenue is determined by the effective yield on the instrument (total return).

Revenue arrangements with multiple deliverables

Where two or more revenue-generating activities or deliverables are sold under a single arrangement, each deliverable that is considered to be a separate unit of accounting is accounted for separately. When the deliverables in a multiple deliverable arrangement are not considered to be separate units of accounting, the arrangement is accounted for as a single unit.



135


2.18 Revenue (continued)

We allocate the consideration from the revenue arrangement to its separate units based on the relative fair values of each unit. If the fair value of the delivered item is not available, then revenue is allocated based on the difference between the total arrangement consideration and the fair value of the undelivered item. The revenue allocated to each unit is then recognised in accordance with our revenue recognition policies previously described above.

2.19 Advertising expenses

Costs for advertising products and services or promoting our corporate image are expensed as incurred. These costs are included in promotion and advertising expenses within our other expenses category.

2.20 Borrowing costs

Borrowing costs are recognised as an expense in our income statement when incurred.

2.21 Taxation

(a) Income taxes

Our income tax expense represents the sum of current tax and deferred tax. Current tax is calculated on accounting profit after allowing for non-taxable and non-deductible items based on the amount expected to be paid to taxation authorities on taxable profit for the period. Deferred tax is calculated at the tax rates that are expected to apply to the period when our asset is realised or the liability is settled. Both our current tax and deferred tax are calculated using tax rates that have been enacted or substantively enacted at reporting date.

We apply the balance sheet liability method for calculating our deferred tax. Deferred tax is the expected tax payable or recoverable on all taxable and deductible temporary differences determined through reference to the tax bases of assets and liabilities and their carrying amount for financial reporting purposes as at the reporting date.

We generally recognise deferred tax liabilities for all taxable temporary differences, except to the extent that the deferred tax liability arises from:

• the initial recognition of goodwill; or• the initial recognition of an asset or liability in a transaction that is

not a business combination and affects neither our accounting profit or taxable income at the time of the transaction.

In respect of our investments in subsidiaries, associates and jointly controlled entities, we recognise deferred tax liabilities for all taxable temporary differences, except where we are able to control the timing of our temporary difference reversal and it is probable that the temporary difference will not reverse in the foreseeable future.

Subject to the exceptions described above, we generally recognise deferred tax assets for all deductible temporary differences and for the carry forward of unused tax losses and tax credits. These tax assets are recognised to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax losses and tax credits can be utilised.

In respect of our investments in subsidiaries, associates and jointly controlled entities, we recognise deferred tax assets for all deductible temporary differences provided it is probable that our temporary differences will reverse in the future and taxable profit will be available against which our temporary differences can be utilised.

The carrying amount of our deferred tax assets is reviewed at each reporting date. We reduce the carrying amount to the extent that it is no longer probable that sufficient taxable profit will be available to allow the benefit of part or the entire deferred tax asset to be utilised. At each reporting date, we subsequently reassess our unrecognised deferred tax assets to determine whether it has become probable that future taxable profit will allow this deferred tax asset to be recovered.

Our current and deferred tax is recognised as an expense or revenue in the income statement, except when it relates to items directly debited or credited to equity, in which case our current and deferred tax is also recognised directly in equity.

The Telstra Entity and its Australian resident wholly owned entities elected to form a tax consolidated group from 1 July 2002. The Telstra Entity, as the head entity in the tax consolidated group, recognises in addition to its transactions, the current tax liabilities and the deferred tax assets arising from unused tax losses and tax credits for all entities in the group. The Telstra Entity and the entities in the tax consolidated group account for their own current tax expense and deferred tax amounts. These tax amounts are measured as if each entity in the tax consolidated group continues to be a separate taxpayer within the group.



136


2.21 Taxation (continued)

Under our tax funding arrangements, amounts receivable recognised by the Telstra Entity for the current tax payable assumed of our wholly owned entities are booked as a current receivable. Amounts payable recognised by the Telstra Entity for the current tax receivable of our wholly owned entities are booked as a current payable. Amounts relating to unused tax losses and tax credits of the wholly owned entities and assumed by the Telstra Entity are recorded as dividend revenue. During fiscal 2005, no tax funding arrangement was in place and as a result, these funding amounts were recorded as equity contributions to or distributions from our controlled entities.

We offset deferred tax assets and deferred tax liabilities in the balance sheet where they relate to income taxes levied by the same taxation authority and to the extent that we intend to settle our current tax assets and liabilities on a net basis. Our deferred tax assets and deferred tax liabilities are netted within the tax consolidation group, as these deferred tax balances relate to the same taxation authority. We do not net deferred tax balances between controlled entities, apart from those within the tax consolidation group.

(b) Goods and Services Tax (GST) (including other value added taxes)

We record our revenue, expenses and assets net of any applicable goods and services tax (GST), except where the amount of GST incurred is not recoverable from the Australian Taxation Office (ATO). In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of the expense item.

Receivables and payables balances include GST where we have either included GST in our price charged to customers or a supplier has included GST in their price charged to us. The net amount of GST due, but not paid, to the ATO is included under payables.

2.22 Earnings per share

(a) Basic earnings per share

Basic earnings per share (EPS) is determined by dividing profit for the year after income tax attributable to members of the company, excluding any costs of servicing equity other than ordinary shares, by the weighted average number of ordinary shares outstanding during the period.

(b) Diluted earnings per share

Diluted earnings per share is calculated by dividing the profit attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period (adjusted for the effects of the instruments in the Telstra Growthshare Trust and the Telstra Employee Share Ownership Plans).

2.23 Insurance

We specifically carry the following types of insurance:

• property;• travel/personal accident;• third party liability;• directors’ and officers’ liability;• company reimbursement; and• other insurance from time to time.

For risks not covered by insurance, any losses are charged to the income statement in the year in which the loss is reported.

The Telstra Entity and certain controlled entities are self insured for workers’ compensation.

2.24 Post-employment benefits

(a) Defined contribution plans

Our commitment to defined contribution plans is limited to making contributions in accordance with our minimum statutory requirements. We do not have any legal or constructive obligation to pay further contributions if the fund does not hold sufficient assets to pay all employee benefits relating to current and past employee services.

Contributions to defined contribution plans are recorded as an expense in the income statement as the contributions become payable. We recognise a liability when we are required to make future payments as a result of employee services provided.

(b) Defined benefit plans

We currently sponsor a number of post-employment benefit plans.As these plans have elements of both defined contribution and defined benefit, these hybrid plans are treated as defined benefit plans in accordance with AASB 119: “Employee Benefits”. We recognise an asset/(liability) for the net surplus/(deficit) recorded in each of our post-employment defined benefit plans.

At reporting date, where the fair value of the plan assets exceeds the present value of the defined benefit obligations, the net surplus is recognised as an asset. We recognise the asset as we have the ability to control this surplus to generate future funds that are available to us in the form of reductions in future contributions or as a cash refund.

At reporting date, where the fair value of the plan assets is less than the present value of the defined benefit obligations, the net deficit would be recognised as a liability.



137


2.24 Post-employment benefits (continued)

We use fair value to determine the value of the plan assets at reporting date. Fair value is calculated by reference to the net market values of the plan assets.

Defined benefit obligations are based on the expected future payments required to settle the obligations arising from our current and past employee services. This obligation is influenced by many factors, including final salaries and employee turnover. We employ qualified actuaries to calculate the present value of the defined benefit obligations. These obligations are measured net of tax.

The actuaries use the projected unit credit method to determine the present value of the defined benefit obligations of each plan. This method determines each year of service as giving rise to an additional unit of benefit entitlement. Each unit is measured separately to calculate the final obligation. The present value is determined by discounting the estimated future cash outflows using rates based on government guaranteed securities with similar due dates to these expected cash flows.

We recognise all our defined benefit costs in the income statement with the exception of actuarial gains and losses that are recognised directly in retained profits. Components of defined benefit costs include current and past service cost, interest cost and expected return on assets. Current and past service cost represents the increase in the present value of the defined benefit obligation resulting from our employees’ service in the current and prior periods respectively. Interest cost represents the increase in the present value of the defined benefit obligation resulting from the employee benefits being one period closer to settlement. Expected return on assets represents movement in market value interest, dividends and other revenue items that is expected to be derived from plan assets.

Actuarial gains and losses are based on an actuarial valuation of each defined benefit plan at reporting date. Actuarial gains and losses represent the differences between previous actuarial assumptions of future outcomes and the actual outcome, in addition to the effect of changes in actuarial assumptions.

The actuaries apply judgment in estimating the following key assumptions used in the calculation of our defined benefit assets at reporting date:

• discount rates; • salary inflation rate; and• expected return on plan assets.

The estimates applied in our calculation have a significant impact on the reported amount of our defined benefit plan assets of $1,029 million (2005: $247 million). If the estimates prove to be incorrect, the carrying value of our defined benefit assets may be materially impacted in the next reporting period. Additional volatility may also potentially be recorded in retained profits to reflect differences between actuarial assumptions of future outcomes applied at the current reporting date and the actual outcome in the next annual reporting period.

Refer to note 28 for details on the key estimates used in the calculation of our defined benefit assets.

2.25 Employee share plans

We own 100% of the equity of Telstra ESOP Trustee Pty Ltd, the corporate trustee for the Telstra Employee Share Ownership Plan Trust (TESOP97) and Telstra Employee Share Ownership Plan Trust II (TESOP99). We consolidate the results, position and cash flows of TESOP97 and TESOP99.

The Telstra Growthshare Trust (Growthshare) was established to allocate equity based instruments as required. Current equity based instruments include options, restricted shares, performance rights, deferred shares, incentive shares, directshares and ownshares. Options, performance rights, and restricted shares are subject to performance hurdles. Deferred shares and incentive shares are subject to a specified period of service.

We own 100% of the equity of Telstra Growthshare Pty Ltd, the corporate trustee for Growthshare. We also include the results, position and cash flows of Growthshare.

We recognise an expense for all share-based remuneration determined with reference to the fair value at grant date of the equity instruments issued. The fair value of our equity instruments is calculated using a valuation technique consistent with the Black Scholes methodology which utilises Monte Carlo simulations, to estimate the price of those equity instruments in an arms length transaction between knowledgeable, willing parties. The fair value is charged against profit over the relevant vesting periods, adjusted to reflect actual and expected levels of vesting.

Under the transitional exemptions of AASB 1, we have elected not to apply the requirements of AASB 2: “Share-Based Payment” (AASB 2) to equity instruments granted prior to 7 November 2002.

Directshare enables non-executive directors to acquire a minimum of 20% of their fees in Telstra shares. Ownshare enables eligible employees to be provided part of their remuneration in Telstra shares. Telstra purchases shares on market to meet the requirements of directshare and ownshare and expenses these costs as part of the participant’s remuneration.



138


2.26 Derivative financial instruments

We use derivative financial instruments such as forward exchange contracts, cross currency swaps and interest rate swaps to hedge risks associated with foreign currency and interest rate fluctuations.

The use of hedging instruments is governed by the guidelines set by our Board of Directors.

(a) From 1 July 2004 to 30 June 2005

We have elected to apply the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. Accordingly, we have applied previous AGAAP in the comparative information on financial instruments within the scope of AASB 132 and AASB 139. For further information on previous AGAAP refer to the annual report for the year ended 30 June 2005.

(b) Adjustments on transition date: 1 July 2005

Under AASB 132/139, our accounting policy has changed to recognise our financial instruments in the balance sheet and to record all derivatives at fair value. At the date of transition, changes in the carrying amounts of derivatives are taken to retained profits or reserves, depending on the hedge type. For further information concerning the adjustments on transition date reference should be made to note 36.

(c) From 1 July 2005

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured to fair value. The method of recognising the resulting remeasurement gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. Where we hold derivative financial instruments that are not designated as hedges, they are categorised as ‘held for trading’ financial instruments. All of our derivative financial instruments are stated at fair value.

The carrying value of our cross currency and interest rate swaps refers to the fair value of our receivable or payable under the swap contract, recorded as a hedge receivable or hedge payable in our balance sheet. We do not offset the hedge receivable or hedge payable with the underlying financial asset or financial liability being hedged, as the transactions are generally with different counterparties and are not generally settled on a net basis.

Where we have a legally recognised right to set off the financial asset and the financial liability, and we intend to settle on a net basis or simultaneously, we record this position on a net basis in our balance sheet. Where we enter into master netting arrangements relating to a number of financial instruments, have a legal right of set off, and intend to do so, we also include this position on a net basis in our balance sheet.

Our derivative instruments that are held to hedge exposures can be classified into three different types, depending on the reason we are holding them - fair value hedges, cash flow hedges and hedges of net investment in foreign operations.

Hedge accounting can only be utilised where effectiveness tests are met on both a prospective and retrospective basis. Ineffectiveness may result in significant volatility in the income statement.

In order for a derivative instrument to qualify for hedge accounting it must be formally designated and documented as a hedge of a particular item or transaction, it must be expected to be highly effective in offsetting changes in cash flows or fair value of the hedged item, and for cash flow hedges of forecast transactions, the forecast transaction must be highly probable.

We document at the inception of a transaction the relationship between hedging instruments and hedged items, as well as our risk management objective and strategy for undertaking various hedge transactions. We also document our assessment, both at hedge inception and on an ongoing basis, of whether the hedging instruments that are used in hedging transactions have been, and will continue to be, highly effective in offsetting changes in fair values or cash flows of hedged items.

(i) Fair value hedges

We use fair value hedges to mitigate the risk of changes in the fair value of our foreign currency borrowings from foreign currency and interest rate fluctuations over the hedging period.

Where a fair value hedge qualifies for hedge accounting, gains or losses from remeasuring the fair value of the hedge instrument are recognised in the income statement, together with gains and losses in relation to the hedged item where those gains or losses relate to the risks intended to be hedged. This will increase volatility of reported profits due to the inclusion of some ineffectiveness arising from the application of hedge accounting.



139


2.26 Derivative financial instruments (continued)

(ii) Cash flow hedges

We use cash flow hedges to mitigate the risk of variability of future cash flows attributable to foreign currency fluctuations over the hedging period. Cash flow hedges are used for our foreign currency borrowings, and our ongoing business activities, predominantly where we have highly probable purchase or settlement commitments in foreign currencies.

Where a cash flow hedge qualifies for hedge accounting, the effective portion of gains or losses on remeasuring the fair value of the hedge instrument are recognised directly in equity in the cash flow hedging reserve until such time as the hedged item affects profit or loss, then the gains or losses are transferred to the income statement. However, in our hedges of forecast transactions, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed asset), the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset. Gains or losses on any portion of the hedge determined to be ineffective are recognised immediately in the income statement. The application of hedge accounting will create some volatility in equity reserve balances.

When a hedging instrument expires or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the hedged item is ultimately recognised in the income statement.

If a forecast hedged transaction is no longer expected to occur, the cumulative gains or losses on the hedging instrument that were reported in equity are transferred immediately to the income statement.

(iii) Hedges of a net investment in a foreign operation

Our investments in foreign operations are exposed to foreign currency risk, which arises when we translate the net assets of our foreign investments from their functional currency to Australian dollars.We hedge our net investments to mitigate exposure to this risk by using forward foreign currency contracts, cross currency swaps and/or commercial paper in the relevant currency of the investment.

Gains and losses on remeasurement of our derivative instruments designated as hedges of foreign investments are recognised in the foreign currency translation reserve in equity to the extent they are considered to be effective.

The cumulative amount of the recognised gains or losses included in equity are transferred to the income statement when the foreign operation is sold.

For all of our hedging instruments (fair value, cash flow or net investment), any gains or losses on remeasuring to fair value any portion of the instrument not considered to be effective are recognised directly in the income statement in the period in which they occur.

(iv) Derivatives that are not in a designated hedging relationship

For any ‘held for trading’ derivative instruments, i.e. those which are not in a designated hedging relationship, any gains or losses on remeasuring the instruments to fair value are recognised directly in the income statement in the period in which they occur.

(v) Embedded derivatives

Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and characteristics are not closely related to those of the host contracts and the host contracts are not measured at fair value through profit or loss.



140


2.27 Fair value estimation

The fair value of our derivatives and some financial assets and financial liabilities must be estimated for recognition and measurement or for disclosure purposes.

Valuation techniques include where applicable, reference to prices quoted in active markets, discounted cash flow analysis, fair value of recent arm’s length transactions involving the same instruments or other instruments that are substantially the same, and option pricing models.

We calculate the fair value of our forward exchange contracts by reference to forward exchange market rates for contracts with similar maturity profiles at the time of valuation.

The net fair values of our cross currency and interest rate swaps and other financial assets and financial liabilities that are measured at fair value (apart from our listed investments) are determined using valuation techniques which utilise data from observable markets. Assumptions are based on market conditions existing at each balance date. The fair value is calculated as the present value of the estimated future cash flows using an appropriate market based yield curve, which is independently derived and representative of Telstra’s cost of borrowing. The net fair values of our listed investments are determined by reference to prices quoted on the relevant stock exchanges where the securities are traded.

Unless there is evidence to suggest otherwise, the nominal value of financial assets and financial liabilities less any adjustments for impairment with a short term to maturity are considered to approximate net fair value.

2.28 Financial assets

From 1 July 2004 to 30 June 2005

We have elected to apply the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. Accordingly, we have applied previous AGAAP in the comparative information on financial instruments within the scope of AASB 132 and AASB 139. For further information on previous AGAAP refer to the annual report for the year ended 30 June 2005.

(a) Adjustments on transition date: 1 July 2005

The nature of the main adjustments to ensure this information complies with AASB 132 and AASB 139 are that, with the exception of held-to-maturity investments and loans and receivables which are measured at amortised cost (refer below), fair value is the measurement basis. Fair value is inclusive of transaction costs. At the date of transition, adjustments to carrying amounts are taken to retained profits or reserves. With the exception of those financial assets which are designated in hedge relationships (refer to note 2.26), at the date of transition to AASB 132 and AASB 139 there were no significant adjustments to carrying amounts. For further information concerning the adjustments on transition date, reference should be made to note 36.

(b) From 1 July 2005

We classify our financial assets in the following categories. These are financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, and available-for-sale financial assets. The classification depends on the purpose for which the investments were acquired. We determine the classification at initial recognition and re-evaluate this designation at each reporting date.

(i) Financial assets at fair value through profit or loss

This category has two sub-categories: financial assets held for trading, and those designated at fair value through profit or loss. Derivatives are categorised as held for trading unless they are designated as hedges. Assets in this category are classified as current assets if they are either held for trading or are expected to be realised within twelve months of the balance date.

(ii) Loans and receivables

Loans and receivables are non derivative financial assets with fixed or determinable payments that are not quoted in an active market. They arise when we provide money, goods or services directly to a debtor with no intention of selling the receivable. They are included in current assets, except for those with maturities greater than twelve months after the balance sheet date, which are classified as non current assets. Loans and receivables are included in receivables in the balance sheet.

(iii) Held-to-maturity investments

Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturities where we have the positive intention and ability to hold to maturity.



141


2.28 Financial assets (continued)

(iv) Available-for-sale financial assets

Available-for-sale financial assets, comprising principally marketable equity securities, are non-derivatives that are either designated in this category or not classified in any of the other categories. They are included in non current assets unless management intends to dispose of the investment within twelve months of the balance sheet date.

Available-for-sale financial assets and financial assets at fair value through profit and loss are subsequently carried at fair value. Loans and receivables and held-to-maturity investments are subsequently carried at amortised cost using the effective interest method less impairment. The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating the interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

In the event that we have ‘financial assets at fair value through the profit or loss’ realised and unrealised gains and losses arising from changes in the fair value are included in the income statement in the period in which they arise. Unrealised gains and losses arising from changes in the fair value of financial assets classified as available-for-sale are recognised in equity in the available-for-sale investments reserve. When financial assets classified as available-for-sale are sold or impaired, the accumulated fair value adjustments, previously recognised in equity, are included in the income statement.

Purchases and sales of financial assets are recognised on settlement date - the date on which we receive or deliver an asset. Financial assets are initially recognised at fair value plus, in the case of a financial asset not at fair value through profit and loss, transaction costs. Financial assets are derecognised when the rights to receive cash flows from the financial assets have expired or have been transferred and we have transferred substantially all the risks and rewards of ownership.

2.29 Financial instrument transaction costs

We have elected to apply the exemption available under AASB 1 to apply AASB 132 and AASB 139 from 1 July 2005. Accordingly, we have applied previous AGAAP in the comparative information on financial instruments within the scope of AASB 132 and AASB 139. Under previous AGAAP, transaction costs were excluded from the carrying value of our financial assets and financial liabilities disclosed in the financial report. Under A-IFRS such costs are included in the carrying amounts. At the date of transition to AASB 132 and AASB 139 the adjustment to carrying amounts was immaterial.



142


(a) In order to underpin the equity instruments issued under the Growthshare plan, Growthshare purchase shares on market. These shares are not considered to be outstanding for the purposes of computing basic and diluted earnings per share.

(b) During fiscal 2005, we completed an off-market share buy-back of 185,284,669 ordinary shares as part of our capital management program. The ordinary shares were bought back at $4.05 per share, comprising a fully franked dividend component of $2.55 per share and a capital component of $1.50 per share. The Commonwealth of Australia did not participate in the share buy-back.

Refer to note 21 for full details on our movement in issued ordinary shares, including further discussion on our prior year share buy-back.

(c) In fiscal 2006 and fiscal 2005, the following equity instruments are considered dilutive to earnings per share:

• deferred share instruments issued under Telstra Growthshare Trust (Growthshare);

• incentive shares granted under the Growthshare short term incentive scheme; and

• share options issued under Telstra Employee Share Ownership Plan I (TESOP97).

In fiscal 2006 and fiscal 2005, the following equity instruments are not considered dilutive to earnings per share:

• performance rights, restricted shares and options issued under Growthshare; and

• share options issued under Telstra Employee Share Ownership Plan II (TESOP99).

Refer to note 31 for details regarding equity instruments issued under the Growthshare and TESOP share plans.

3. Earnings per share

Telstra GroupYear ended 30 June

2006 2005¢ ¢

Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.7 34.7

Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.7 34.6

$m $mEarnings used in the calculation of basic and diluted earnings per shareProfit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 4,309

Number of shares(millions)

Weighted average number of ordinary shares (a)Weighted average number of ordinary shares used in the calculation of basic earnings per share (b) . 12,366 12,430Effect of dilutive employee share instruments (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 37Weighted average number of ordinary shares used in the calculation of diluted earnings per share . . 12,401 12,467


143


Our dividends paid are fully franked at a tax rate of 30%.

Dividends per ordinary share declared

Our dividends declared per share in respect of fiscal year as disclosed on the face of our income statement is detailed below:

(a) As our final dividend for fiscal 2006 was not declared, determined or publicly recommended by the Board as at 30 June 2006, no provision for dividend was raised prior to, or as at, that date in the balance sheet. Our final dividend has been reported as an event subsequent to balance date and the provision for dividend has been raised at the declaration date. Refer to note 34 for further details.

4. Dividends


2006 2005 2006 2005$m $m $m $m

Dividends paidPrevious year final dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,739 1,639 1,739 1,639Previous year special dividend paid with the final dividend . . . . . . . . . . . . . . . . . 746 - 746 -Interim dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,739 1,739 1,739 1,739Special dividend paid with the interim dividend . . . . . . . . . . . . . . . . . . . . . . . . 746 746 746 746Total dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,970 4,124 4,970 4,124

Dividends per ordinary share paid ¢ ¢Previous year final dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 13.0Previous year special dividend paid with the final dividend . . . . . . . . . . . . . . . . . 6.0 -Interim dividend paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 14.0Special dividend paid with the interim dividend . . . . . . . . . . . . . . . . . . . . . . . . 6.0 6.0Total dividends paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.0 33.0


2006 2005¢ ¢

Dividends declared per ordinary shareInterim dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 14.0Special dividend paid with the interim dividend . . . . . . . . . . . . . . . . . . 6.0 6.0Final dividend (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.0 14.0Special dividend paid with the final dividend . . . . . . . . . . . . . . . . . . . . - 6.0Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0 40.0


144


(a) Previously, the Telstra Entity and its Australian resident wholly owned entities elected to form a tax consolidated group. As part of the election to enter tax consolidation, the tax consolidated group is treated as a single entity for income tax purposes. On entry into tax consolidation, the franking credits held in the franking accounts and exempting accounts of the subsidiary members was transferred to the Telstra Entity. As a result, one franking account and one exempting account is maintained by the Telstra Entity for the tax consolidated group.

As at 30 June 2006, the Telstra Entity had a combined exempting and franking account balance of $6 million (2005: $285 million). This total combines the deficit in our franking account of $18 million (2005: surplus of $261 million) and a surplus of $24 million (2005: $24 million) in our exempting account.

The franking account balance represents the amount of tax paid by the entity that is available for distribution to shareholders. As at 30 June 2006, our franking account balance was in deficit. As a result, we are required to pay franking deficit tax of $18 million in July 2006, which will eliminate the deficit in the franking account balance and be fully offset against our fiscal 2006 income tax assessment. In relation to our exempting account, there are statutory restrictions placed on the distribution of credits from this account.

Additional franking credits will arise when the Telstra Entity pays tax instalments during fiscal 2007, relating to the fiscal 2006 and 2007 income tax years. Franking credits will be used when the Telstra Entity pays its 2006 final ordinary dividend during fiscal 2007.

(b) Franking credits that will arise from the payment of income tax are expressed at the 30% tax rate on a tax paid basis. This balance represents the current tax liabilities as at 30 June 2006 for the tax consolidated group.

(c) The franking debits that will arise when we pay our final ordinary dividend are expressed as the amount of franking credits that will be attached to a fully franked distribution.

We believe our current balance of franking credits combined with the franking credits that will arise on tax instalments expected to be paid during fiscal 2007, will be sufficient to cover the franking debits arising from our final dividend. Refer to note 34 for further details in relation to our dividends declared subsequent to year end.

4. Dividends (continued)

Telstra EntityYear ended 30 June

2006 2005$m $m

The combined amount of exempting and franking credits available to us for the next fiscal year are:Combined exempting and franking account balance (a) . . . . . . . . . . . . . . . . . . . 6 285Franking credits that will arise from the paymentof income tax payable as at 30 June (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 519Franking credits and exempting credits that we may beprevented from distributing in the next fiscal year. . . . . . . . . . . . . . . . . . . . . . . (24) (24)

382 780

Franking debits that will arise on the payment of dividends declared after 30 June (c)Final dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 745 745Special dividend paid with the final dividend . . . . . . . . . . . . . . . . . . . . . . . . . . - 320

745 1,065


145


5. Segment information

We report our segment information on the basis of business segments as our risks and returns are affected predominantly by differences in the products and services we provide through those segments.

Our internal management reporting structure drives how our Company is organised and managed. This internal structure provides the initial basis for determining our business segments.

Our business segments are predominantly distinguishable by the different type of customers we deliver our key products and services to. Our customer facing business segments service different customer types. Other reportable business segments are also aligned with our specific customer or business needs. These segments provide operational support services or product support services to our customer facing business segments, or service other telecommunication carriers. Our “Other” segment consists of various business units that do not qualify as business segments in their own right and which service a variety of customer or business needs.

The main adjustments from our internal management reporting structure to our reported business segments are in relation to certain offshore operations. For internal management reporting purposes, our TelstraClear group (TelstraClear) is included with Telstra Enterprise and Government, our CSL New World Mobility group (CSL New World) is a business unit in its own right, and the International Head Office group is included as part of Strategic Marketing. These offshore operations are reported as part of a segment we have called Telstra International for segment reporting purposes.

For the purposes of the applicable accounting standard, we consider that the risks and returns of these offshore operations differ from those of our local operations and as a result we have grouped these operations into the Telstra International business segment.

Business segments

During fiscal 2006, we created the following new business segments:

• Telstra Business;• Telstra Operations; and• Strategic Marketing.

The Telstra Business group has been drawn from the Telstra Consumer Marketing and Channels group (formerly known as Telstra Consumer and Marketing), Telstra Country Wide and the Telstra Enterprise and Government (formerly known as Telstra Business and Government) business units.

The Strategic Marketing group was drawn from various business units across Telstra comprising mainly Telstra Consumer Marketing and Channels.

The Telstra Operations group combined Telstra Services (formerly known as Infrastructure Services), Telstra Technology, Innovation and Products, and Operations Support, which moved from being reported within our corporate areas.

Those business segments not impacted by the above restructures are substantially consistent with their structure in the prior year. We have restated all our comparative information to reflect our current reporting position as if all our new business segments and segment accounting policies existed in fiscal 2005.

For segment reporting purposes, the Telstra Group is organised into the following business segments:

Telstra Consumer Marketing and Channels (TC&C) is responsible for:• the provision of the full range of telecommunication products,

services and communication solutions to consumers; and• leading the mass market channels including inbound and

outbound call centres, Telstra Shops and Telstra Dealers.

Telstra Business (TB) is responsible for:• the provision of the full range of telecommunication products and

services, communication solutions, and information and communication technology services to small to medium enterprises.

Telstra Enterprise and Government (TE&G) is responsible for:• the provision of the full range of telecommunication products and

services, communication solutions, and information and communication technology services to corporate and government customers; and

• the provision of global communication solutions to multi-national corporations through our interests in the United Kingdom, Asia and North America.

Telstra Wholesale (TW) is responsible for:• the provision of a wide range of telecommunication products and

services delivered over our networks and associated support systems to:

• non-Telstra branded carriers, carriage service providers, Internet service providers, system integrators and application service providers; and

• infrastructure owners and managers who acquire infrastructure services.


146


Sensis is responsible for:• the management and growth of the information, advertising and

directories business, including printed publications, directory assistance, and online products and services.

Telstra International (TInt.) consists of the following offshore business operations:• CSL New World is responsible for our operations in Hong Kong that

mainly generate revenues from the mobiles market; • International Head Office Group is responsible for our Asia-Pacific

investments; and• TelstraClear is our New Zealand subsidiary that provides

integrated telecommunications services to the New Zealand market.

Telstra Operations (TO) is responsible for:• co-ordination and execution for our company’s multi-year

business improvement and transformation program;• leading the identification, analysis, validation, development and

implementation of product, technology and information technology strategies for both the network infrastructure and customer solutions of our Company;

• overall planning, design, specification of standards, commissioning and decommissioning of our communication networks;

• construction of infrastructure for our Company’s fixed, mobile, Internet protocol (IP) and data networks;

• operation and maintenance, including activation and restoration of these networks;

• supply and delivery of information technology solutions to support our products, services and customer support function;

• the development and lifecycle management of products and services over the networks, as well as application platforms and the online environment; and

• operational support functions for our Company, including procurement, billing, credit management and property management.

Telstra Country Wide (TCW) is responsible for:• the management and control of providing telecommunication

products and services to consumer, small business, enterprise and some government customers outside the mainland state capital cities, in outer metropolitan areas, and in Tasmania and the Northern Territory.

Telstra BigPond is responsible for:• the management and control of our retail Internet products,

services and content, contact centres, customer relations and associated functions, for broadband and narrowband delivery.

Telstra Media is responsible for:• the management of our investment interest in the FOXTEL

partnership;• the development and management of the hybrid fibre coaxial

(HFC) cable network; and• investigation and development of an interactive PayTV (IPTV)

service.

Strategic Marketing is responsible for:• the co-ordination and delivery of marketing activities across our

Company and market segments.

Corporate areas include:• Legal Services - provides legal services across the Company;• Public Policy and Communications - responsible for managing our

relationships and positioning with key groups such as our customers, the media, governments, community groups and staff. It also has responsibility for regulatory positioning and negotiation;

• Finance and Administration - encompasses the functions of business and finance services, treasury, risk management and assurance, investor relations and the office of the company secretary. It also includes the financial management of the majority of the Telstra Entity fixed assets (including network assets) through the Asset Accounting Group; and

• Human Resources - encompasses talent management, organisational development, human resource operations, health, safety and environment, as well as workplace relations and remuneration.

In our segment financial results, the “Other” segment consists of various business units that do not qualify as reportable segments in their own right. These include:

• Telstra Country Wide;• Telstra BigPond;• Telstra Media;• Strategic Marketing; and• our corporate areas.

5. Segment information (continued)


147


Segment financial results

For segment reporting purposes, we have reallocated certain items between the respective business segments pursuant to the definitions of segment revenues, segment expenses, segment assets and segment liabilities contained in the applicable accounting standard, where a reasonable allocation basis exists.

Where no reasonable allocation basis exists, we have not reallocated individual items to alternative segments. For segment reporting purposes, these items are reported within the same business segment as for internal management reporting. As a result, our segment revenues, segment expenses, segment assets and segment liabilities do not reflect actual operating results achieved for our business segments in certain circumstances.

The following narrative further explains our segment results for those individual items where it is considered that no reasonable allocation basis exists:

• Sales revenue associated with mobile handsets for TC&C, TB and TE&G are allocated totally to the TC&C segment, with the exception of some products sold in relation to small to medium enterprises which are allocated to TB. Ongoing prepaid and postpaid mobile revenues derived from our mobile usage is recorded in TC&C, TB and TE&G depending on the type of customer serviced. In addition, the majority of goods and services purchased associated with our mobile revenues are allocated to the TC&C segment. As a result, the TC&C segment also holds segment assets and segment liabilities related to those revenues and expenses recorded in TC&C;

• trade debtors in relation to the mobile repayment option on mobile handsets sold by our dealers are allocated totally to TC&C; and

• revenue received in advance in relation to installation and connection fees is allocated totally to TC&C.

These allocations reflect management’s accountability framework and internal reporting system and accordingly no reasonable basis for reallocation to the respective business segments exist.

In addition, revenue derived from our BigPond Internet products and its related segment assets are recorded in the customer facing business segments of TC&C, TB and TE&G. Certain distribution costs in relation to these products are recognised in these three business segments. Telstra Operations recognise certain expenses in relation to the installation and running of the broadband cable network. The related segment assets are managed by the Asset Accounting Group. In accordance with our application of the business segment definition in relation to customer type, we have not reallocated these items to the Telstra Bigpond business segment.

Change in segment accounting policies

The following segment accounting policy changes occurred during fiscal 2006:

Interconnection revenue

In previous financial years, our segment accounting policy was to recognise our revenue relating to interconnection entirely in ourTW business segment. In fiscal 2006, some parts of the revenue earned from interconnection were allocated to the TC&C, TB and TE&G business segments to match the revenue recognised with the associated expense. As a result, revenue in TW decreased by $633 million and revenue increased in TC&C by $500 million, TB by $52 million and TE&G by $81 million in fiscal 2005 to reflect this change in policy.

Segment assets and liabilities

Segment assets and segment liabilities form part of the operating activities of a segment and can be allocated directly to that segment.

The Asset Accounting Group performs a company wide function in relation to the financial management of certain assets. These assets are accounted for at the corporate level (aggregated in the “Other” segment) and not allocated across segments.

The “Other” segment also includes balances that do not meet the definition of segment assets and segment liabilities for our reportable business segments. As a result, borrowings and income tax assets and liabilities were recorded as reconciling items within the “Other” segment.

Inter-segment transfers

We account for all transactions of entities within the Telstra Group, including international transactions between Australian and non-Australian businesses, at market value. For segment reporting purposes, transfer pricing is not used within the Company. As such the inter-segment revenue line purely relates to intercompany revenue.

The Asset Accounting Group does not allocate depreciation expense related to the use of assets owned at the corporate level to other business segments.



148


(a) Revenue for the other segment relates primarily to our revenue earned by Telstra Media from our share of FOXTEL cable subscriber revenue and for services provided to FOXTEL. The Asset Accounting Group is the main contributor to the segment result for this segment, which is primarily depreciation and amortisation charges.

Segment assets for the “Other” segment includes the Telstra Entity fixed assets (including network assets) managed through the centralised Asset Accounting Group. Segment liabilities includes income tax liabilities and borrowings, which have been reallocated from the reportable business segment in accordance with the applicable accounting standard.


Telstra GroupTC&C TB TE&G TW Sensis TInt.

TO Other

(a)Elimina-

tions TotalYear ended 30 June 2006 $m $m $m $m $m $m $m $m $m $m

Revenue from external customers . . 8,897 3,053 4,607 2,607 1,826 1,450 226 106 - 22,772Add inter-segment revenue . . . . . . - - 57 292 10 31 83 7 (480) -Total segment revenue . . . . . . . . . 8,897 3,053 4,664 2,899 1,836 1,481 309 113 (480) 22,772

Segment result under A-IFRS . . . . . 5,721 2,412 2,702 2,693 865 86 (4,175) (4,903) 29 5,430Share of equity accounted net (losses)/profits . . . . . . . . . . . . . . - - - - (1) 12 - (6) - 5Less net gain on sale of investments . - - 4 - - 58 - - - 62Earnings before interest and income tax expense (EBIT) - segment result under USGAAP . . . . . . . . . . . . . . 5,721 2,412 2,706 2,693 864 156 (4,175) (4,909) 29 5,497

Earnings has been calculated after charging/(crediting) the following non cash expenses:Impairment losses . . . . . . . . . . . . 140 10 8 - 13 11 143 26 - 351Reversal of impairment losses. . . . . - - - (20) - - (2) - - (22)Depreciation and amortisation . . . . - - 63 - 91 298 48 3,587 - 4,087Other significant non cash expenses. 26 4 20 5 1 3 144 7 - 210

Non current segment assets acquired (excluding acquisition of investments) 11 - 89 23 96 224 4,032 5 - 4,480

As at 30 June 2006Segment assets . . . . . . . . . . . . . . 1,437 370 1,767 453 1,886 3,817 3,308 23,316 (179) 36,175Segment assets include:Investment in jointly controlled entities . . . . . . . . . . . . . . . . . . . - - 1 - - 1 - - - 2Investment in associated entities. . . - - 18 - 3 - - - - 21

-

Segment liabilities . . . . . . . . . . . . 1,260 165 618 241 673 615 2,534 17,414 (177) 23,343


149


(a) Revenue for the other segment relates primarily to our revenue earned by Telstra Media from our share of FOXTEL cable subscriber revenue and for services provided to FOXTEL. The Asset Accounting Group is the main contributor to the segment result for this segment, which is primarily depreciation and amortisation charges.

Segment assets for the other segment includes the Telstra Entity fixed assets (including network assets) managed through the centralised Asset Accounting Group. Segment liabilities excludes income tax liabilities and borrowings, which are included as part of the other segment.


Telstra GroupTC&C TB TE&G TW Sensis TInt.

TO Other

(a)Elimina-

tions TotalYear ended 30 June 2005 $m $m $m $m $m $m $m $m $m $m

Revenue from external customers . . 8,931 3,099 4,570 2,267 1,708 1,360 161 85 - 22,181Add inter-segment revenue . . . . . . - - 52 284 11 38 77 2 (464) -Total segment revenue . . . . . . . . . 8,931 3,099 4,622 2,551 1,719 1,398 238 87 (464) 22,181

Segment result under A-IFRS . . . . . 6,179 2,488 2,807 2,283 812 94 (3,371) (4,345) 3 6,950Share of equity accounted net (losses)/profits . . . . . . . . . . . . . . 3 - 5 - - (96) - (6) - (94)Less net gain on sale of investments . 66 - - - - 13 - - - 79Earnings before interest and income tax expense (EBIT) - segment result under USGAAP . . . . . . . . . . . . . . 6,248 2,488 2,812 2,283 812 11 (3,371) (4,351) 3 6,935

Earnings has been calculated after charging/(crediting) the following non cash expenses:Impairment losses . . . . . . . . . . . . 115 18 12 - 17 7 20 30 (29) 190Depreciation and amortisation . . . . - - 46 - 64 266 1 3,152 - 3,529Other significant non cash expenses. 25 3 22 6 4 3 139 24 - 226

Non current segment assets acquired (excluding acquisition of investments) 16 - 45 503 74 246 3,052 110 - 4,046

As at 30 June 2005Segment assets . . . . . . . . . . . . . . 1,448 343 1,635 356 1,836 3,641 2,750 23,702 (500) 35,211Segment assets include:Investment in jointly controlled entities . . . . . . . . . . . . . . . . . . . - - 3 - - 33 - - - 36Investment in associated entities. . . - - 8 - 4 - - - - 12

Segment liabilities . . . . . . . . . . . . 1,021 119 639 148 665 547 2,024 16,887 (497) 21,553


150




2006 2005Note $m $m

Reconciliation of segment results to Telstra Group position:Earnings before interest and income tax expense (EBIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,497 6,935Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 83Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,002) (963)Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,561 6,055Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,380) (1,746)Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 4,309

Information about sales revenue from our products and services:PSTN productsBasic access . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,318 3,362Local calls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023 1,284PSTN value added services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 250National long distance calls. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 913 1,013Fixed to mobile. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,491 1,566International direct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 234Fixed interconnection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 309

7,478 8,018MobilesMobile services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,505 4,307Mobile handsets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 467 381

4,972 4,688Data and internet servicesInternet and IP solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,907 1,377ISDN products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 807 890Specialised data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 884 966

3,598 3,233Other products and servicesAdvertising and directories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 1,585Customer premises equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 231Payphones . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 121Intercarrier services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 351 290Inbound calling products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 449Solutions management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 989 931Offshore controlled entities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,745 1,611Pay TV bundling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 320 263Other sales and service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 759 741

6,702 6,222Sales revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,750 22,161Other revenue (excluding finance income). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 20Total revenue (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 22,772 22,181


151


(i) Our geographical operations are split between our Australian and international operations. Our international operations include the business of our international business segment (primarily businesses in Hong Kong and New Zealand) and our international business that serves multi-national customers in the TE&G segment. No individual geographical area forms a significant part of our operations apart from our Australian operations.



2006 2005$m $m

Information about revenue from our products and services (continued):(a) Sales revenue from our offshore controlled entities is split between the following products and services:International - PSTN products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 484International - Mobiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 849 751International - Data and internet services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287 264International - Intercarrier services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 24International - Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143 88

1,745 1,611

Information about our geographic operations (i)Segment revenue from external customersAustralian customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,014 20,556International customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,758 1,625

22,772 22,181

Carrying amount of segment assetsAustralian customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,966 31,245International customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,209 3,966

36,175 35,211

Non current segment assets acquired (excluding acquisition of investments)Located in Australia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,256 3,800Located in international countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 246

4,480 4,046


152


6. Income


2006 2005 2006 2005Note $m $m $m $m

Sales revenueRendering of services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,427 12,522 10,427 10,783Sale of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 808 691 536 430Rent of network facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,653 7,233 7,655 7,233Construction contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 130 174 136Advertising and directory services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,711 1,585 464 377Procurement (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 647 628

22,750 22,161 19,903 19,587Other revenue (excluding finance income)Dividend revenue- controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 - - 560 223- jointly controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33 - - - 1

- - 560 224Rent from property and motor vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 20 22 20

22 20 582 244Total revenue (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,772 22,181 20,485 19,831

Other incomeNet gain on disposal of:- property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 9 20 10- investments in controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 - - -- investments in jointly controlled and associated entities. . . . . . . . . . . . . . . . . . 58 16 59 26- investments in listed securities and other investments . . . . . . . . . . . . . . . . . . . - 63 - 59

85 88 79 95Other miscellaneous income (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 173 84 38

328 261 163 133Total income (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,100 22,442 20,648 19,964

Finance income- interest on cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 83 60 78- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 3 23

66 83 63 101Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,166 22,525 20,711 20,065


153


(a) The Telstra Entity receives procurement revenue from its controlled entity Sensis Pty Ltd for the use of Yellow Pages® and White Pages® trademarks. Refer to note 33 for further details on transactions involving our related parties.

(b) Other miscellaneous income includes revenue recognised from subsidies received on the Higher Bandwidth Incentive Scheme (HiBIS) and Broadband Connect Incentive Scheme.

HiBiS, which has now concluded, and its replacement program, Broadband Connect, were established by the Commonwealth to allow service providers to provide high bandwidth services to eligible customers in the regional, rural and remote areas of Australia at prices broadly comparable to those prices charged to customers in metropolitan areas.

As a service provider, we are able to claim a rebate from the Commonwealth for each registered HiBIS or Broadband Connect service we provide to an eligible customer. The purpose of the incentive payment is to cover the short fall of providing these services to eligible customers in the regional, rural and remote areas of Australia at metropolitan prices. We recognise these incentive payments as other income.

We have no significant unfulfilled conditions and other contingencies relating to our obligations under the HiBIS and Broadband Connect programs.

6. Income (continued)


154


(i) We have recognised impairment losses relating to the value of our investments in controlled entities, jointly controlled and associated entities, and other entities based on the value in use calculation. The impairment loss in the value of investment in controlled entities was eliminated on consolidation of the Telstra Group.

(ii) We have recognised impairment losses relating to project costs that were capitalised within capitalised software forming part of intangible assets and property, plant and equipment. These projects have subsequently been cancelled and the costs recognised in the income statement as an impairment loss. In fiscal 2006, additional impairment losses were recognised reflecting additional write offs due to our transformation, refer note 7(b) for details.

7. Profit from continuing operations


2006 2005 2006 2005Note $m $m $m $m

(a) Profit before income tax expense (including itemsdisclosed in note 7(b)) has been calculated aftercharging/(crediting) the following items:

LabourIncluded in our labour expenses are the following:Employee redundancy (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 91 516 85Share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 15 10 15 10Defined benefit plan expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28 185 203 182 201

Goods and services purchasedIncluded in our goods and services purchased are the following:Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,421 1,150 1,087 882Rental expense on managed services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69 67 64 62

Other expensesImpairment losses:- impairment in value of inventories (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 11 53 11- impairment in value of trade and other receivables (b) . . . . . . . . . . . . . . . . . . . 161 150 138 131- impairment in value of investments (b) (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 245 27- impairment in amounts owed by controlled entities (b). . . . . . . . . . . . . . . . . .33 - - 382 475- impairment in amounts owed by jointly controlled entities . . . . . . . . . . . . . . .33 2 5 - -- impairment in value of intangibles (b) (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 1 64 -- impairment in value of property, plant and equipment (b) (ii) . . . . . . . . . . . . . . . 69 17 69 17

351 190 951 661Reversal of impairment losses:- reversal of impairment in value of trade and other receivables . . . . . . . . . . . . . . (22) - (22) -- reversal of impairment in value of investments (b) . . . . . . . . . . . . . . . . . . . . . . - - (15) (334)- reversal of impairment in amounts owed by controlled entities. . . . . . . . . . . . .33 - - - (15)

(22) - (37) (349)

Rental expense on operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 667 675 496 502Net foreign currency translation losses/(gains) . . . . . . . . . . . . . . . . . . . . . . . . . 2 (40) (50) (5)Remuneration of auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8 7 6 6Service contracts and other agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,836 1,556 1,796 1,521Promotion and advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 330 285 253General and administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 723 739 542 564Other operating expenses (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 506 358 573 325

4,427 3,815 4,562 3,478


155


7. Profit from continuing operations (continued)


2006 2005 2006 2005Note $m $m $m $m

(a) Profit before income tax expense (including itemsdisclosed in note 7(b)) has been calculated aftercharging/(crediting) the following items (continued):

Depreciation of property, plant and equipment (b)- general purpose buildings including leasehold improvements . . . . . . . . . . . . .14 62 54 54 47- communication assets including leasehold improvements . . . . . . . . . . . . . . . .14 2,953 2,615 2,786 2,508- communication assets under finance lease . . . . . . . . . . . . . . . . . . . . . . . . .14 67 75 67 75- equipment under finance lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 8 9 6 7- other plant, equipment and motor vehicles . . . . . . . . . . . . . . . . . . . . . . . . .14 93 123 45 50

3,183 2,876 2,958 2,687Amortisation of intangible assets- patents and trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 2 2 4 4- licences. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 58 37 18 18- brandnames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 11 10 - -- customer bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 98 86 13 15- deferred expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 8 35 10- software assets (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15 726 510 629 472

904 653 699 5194,087 3,529 3,657 3,206

Finance costs- interest on bills of exchange and commercial paper . . . . . . . . . . . . . . . . . . . . . 65 35 65 35- interest on Telstra bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 486 223 486 223- interest on other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 497 242 497- interest on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 164 169 164- interest on finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 7 2 3- unwinding of discount on liabilities recognised at present value . . . . . . . . . . . . . 40 35 9 2- gain in fair value hedge instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) - (26) -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 2 38 19

1,002 963 985 943

Research and developmentResearch and development expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 29 23 29


156


(b) Income statement items requiring specific disclosure

The separate disclosure of the following material items is relevant in explaining our financial performance.

Our profit for the year has been calculated after charging specific expense items from our continuing operations as detailed below:

(i) On 15 November 2005, we announced the results from the strategic review that was initiated on 1 July 2005. We unveiled a strategy for improving our business by:

• introducing a company wide market based management system;• the adoption of a one factory approach to managing operations;

and• delivering integrated services to our customers.

We also announced several key decisions and commitments regarding our systems, processes and products which will impact the future performance of the Company.



2006 2005 2006 2005Note $m $m $m $m

Redundancy and restructuring related costs (i)Labour- redundancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 - 352 -- restructuring expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 - 50 -

406 - 402 -Goods and services purchased- restructuring expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 - 54 -

Other expenses- restructuring expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 - 105 -- impairment in value of inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 - 18 -- impairment in value of trade and other receivables . . . . . . . . . . . . . . . . . . . . . 14 - 14 -- impairment in value of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 - 61 -- impairment in value of property, plant and equipment . . . . . . . . . . . . . . . . . . . 46 - 46 -

244 - 244 -

Depreciation and amortisation- accelerated amortisation of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160 - 145 -- accelerated depreciation of property, plant and equipment . . . . . . . . . . . . . . . . 262 - 262 -

422 - 407 -1,126 - 1,107 -

Other- impairment in value of controlled entities (ii) . . . . . . . . . . . . . . . . . . . . . . . . . - - 205 -- reversal of impairment in value of controlled entities (ii) . . . . . . . . . . . . . . . . . . - - - (334)- impairment in amounts owed by controlled entities (iii) . . . . . . . . . . . . . . . . . . - - 382 475

- - 587 141Total expense items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,126 - 1,694 141Income tax benefit attributable to those items requiring specific disclosure . . . . . . . (338) - (332) -Net items after income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 788 - 1,362 141


157


For the year ended 30 June 2006, we have recorded a number of restructuring related expenses associated with the implementation of the strategic review initiatives. The redundancy and restructuring costs include the following:

• redundancy costs associated with the reduction in our workforce, including those redundancies that have been provided for (refer to note 19);

• the provision for restructuring costs associated with shutting down certain networks, platforms and applications, property rationalisation, onerous lease costs and replacing customer equipment (refer to note 19);

• the impairment of certain assets due to the decision to shut down certain networks and platforms that are no longer considered recoverable. This also includes the decision to cancel certain projects relating to the development of software and the construction of property, plant and equipment; and

• the accelerated recognition of depreciation and amortisation of certain assets that, while currently in use, will be decommissioned as part of our decision to shut down certain networks, platforms and applications.

A total provision of $427 million has been raised for redundancy and restructuring for the Telstra Group as at 30 June 2006. This includes $395 million recorded in current and non current provisions,$18 million recorded as a reduction in inventory and $14 million recorded as an allowance for other receivables.

(ii) In fiscal 2006, the profit before income tax expense of the Telstra Entity included an expense of $205 million in relation to the impairment of the value of three controlled entities. In fiscal 2005,the profit before income tax expense of the Telstra Entity included a $334 million net gain in relation to the reversal of an impairment of the value of four controlled entities. These balances are eliminated on consolidation for Telstra Group reporting purposes.

Each fiscal year, we review the value of our investment in controlled entities. As a result, we have incurred an impairment loss (or a reversal of an impairment loss) by assessing the carrying value of our controlled entity with its recoverable amount. We review our recoverable amount by reference to its value in use. Refer to note 25 for further details regarding impairment.

(iii) The profit before income tax expense of the Telstra Entity included an impairment loss of $382 million (2005: $475 million) relating to a movement in allowance for amounts owed by a controlled entity. This balance was eliminated on consolidation for Telstra Group purposes. Refer to note 25 for further details regarding impairment.



158


Audit fees

(i) Our Australian statutory auditor is the Australian National Audit Office (ANAO). The audit provided by the ANAO has been subcontracted to Ernst and Young (EY) since fiscal 2000.

(ii) Audit fees charged by EY relate to audit services provided in completing our statutory and regulatory filings other than those subcontracted directly from the ANAO. These services include the audit and review of our offshore controlled entities, the regulatory audits and our USGAAP audit. In addition, this category includes the audit of our other statutory filings such as the filing we are required to make under Japanese law, and the annual report on Form 20-F to meet our United States listing requirements.

Other services

We have processes in place to maintain the independence of the external auditor, including the level of expenditure on non audit services. Fees earned by EY for non audit work are capped at a maximum of 1.0 times the total audit and audit related fees.

Non audit services are pre-approved by the Audit Committee provided they fall within a defined list of services specified by the Audit Committee. Those non-audit services that are not listed have to be specifically approved by the Audit Committee prior to the commencement of any engagement. In addition, all non-audit services with a value over $100,000 must be separately approved by the Audit Committee, even if the service is listed as a pre-approved service.

The provision of non-audit services by EY is monitored by the Audit Committee via bi-annual reports to the Audit Committee. In addition, where engagements involve services from the defined list of services, these are reported to the Audit Committee at the following meeting.

EY has specific internal processes in place to ensure auditor independence.

(iii) Audit related fees charged by EY relate to services that are reasonably related to the performance of the audit or review of our financial statements, and other assurance engagements. These services include our privacy audit, various accounting advice provided and additional audit work arising on the acquisition of our newly acquired controlled entities.

(iv) Tax fees charged by EY mainly relates to licence fee and technical services including training and support services in relation to our tax return software.

(v) Other services relate to all additional services performed by EY, other than those disclosed as auditing and reviewing the financial report, audit related and tax. These services include performance of system and security reviews, and various other reviews and non assurance services across the Company.

8. Remuneration of auditors


2006 2005 2006 2005Note $m $m $m $m

Audit feesThe Australian National Audit Office has charged the following amounts for:Auditing and reviewing the financial reports (i). . . . . . . . . . . . . . . . . . . . . . . . . 4.981 5.038 4.431 4.404Ernst and Young has charged the following amounts for:Auditing and reviewing the financial reports (ii) . . . . . . . . . . . . . . . . . . . . . . . . 2.900 2.290 1.601 1.391Total audit fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7(a) 7.881 7.328 6.032 5.795

Other servicesIn addition to auditing and reviewing the financial reports, other services were provided by Ernst and Young in their own right as follows:Audit related (iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.829 0.571Tax (iv) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.118 0.423Other services (v) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.331 0.703Total other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.278 1.697


159


(a) The Commonwealth statutory income tax rate for fiscal 2006 and fiscal 2005 was 30%. This tax rate is the income tax rate applied to Australian resident companies pursuant to the Income Tax Rates Act.

9. Income taxes


2006 2005 2006 2005$m $m $m $m

Major components of income tax expenseCurrent tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,730 1,740 1,860 1,907Deferred tax resulting from the origination and reversal of temporary differences . . . (386) 4 (411) (28)Under provision of tax in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2 33 3

1,380 1,746 1,482 1,882

Notional income tax expense on profit differs fromactual income tax expense recorded as follows:Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,561 6,055 4,719 6,398

Notional income tax expense on profit calculated at 30% (a): . . . . . . . . . . . . . . . . 1,368 1,817 1,416 1,919

Which is adjusted by the tax effect of:Effect of different rates of tax on overseas income . . . . . . . . . . . . . . . . . . . . . . . (19) (11) - -Non assessable and non deductible items . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (62) 33 (40)Under provision of tax in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 2 33 3Income tax expense on profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380 1,746 1,482 1,882

Amounts recognised directly in equity during the yearDeferred tax debited/(credited) directly in equity during the year . . . . . . . . . . . . . 291 (24) 289 (24)


160


(a) We have recognised a deferred tax asset for the unused tax losses of our offshore controlled entities to the extent that it is probable that future taxable profit will be available against which the unused tax losses can be utilised. We have prepared management budgets and forecasts in line with our current knowledge of future events to support our view of sufficient future taxable profits being available to offset our unused tax losses.

(b) When the underlying transactions to which our deferred tax relates is recognised directly to equity in accordance with applicable accounting standards, the temporary differences associated with these adjustments are also recognised directly in equity.

(c) We are able to offset deferred tax assets and deferred tax liabilities in the balance sheet when they relate to income taxes levied by the same taxation authority and to the extent we intend to settle our current tax assets and liabilities on a net basis.

Our deferred tax assets and deferred tax liabilities are netted within the tax consolidation group, as these deferred tax balances relate to income taxes levied by the Australian Taxation Office. We do not net deferred tax balances between controlled entities, apart from those within the tax consolidation group.

9. Income taxes (continued)


2006 2005 2006 2005$m $m $m $m

Deferred tax asset/(deferred tax liability)

Deferred tax items recognised in income statementProperty, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,872) (1,918) (1,911) (2,019)Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (356) (474) (175) (280)Provision for employee entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 281 246 263Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116 130 - 5Provision for workers' compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 64 62 62Allowance for doubtful debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 46 33 37Defined benefit assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (98) (43) (97)Trade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 38 54 36Provision for redundancy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 - 55 -Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 10 85 1Income tax losses (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106 69 - 4Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 26 27 3

(1,436) (1,826) (1,567) (1,985)Deferred tax items recognised in equity (b)Defined benefit assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (260) 24 (258) 24Derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) - (7) -

(267) 24 (265) 24Net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,703) (1,802) (1,832) (1,961)

Our net deferred tax liability is split as follows (c):Deferred tax assets recognised in the balance sheet . . . . . . . . . . . . . . . . . . . . . . 1 2 - -Deferred tax liabilities recognised in the balance sheet . . . . . . . . . . . . . . . . . . . . (1,704) (1,804) (1,832) (1,961)

(1,703) (1,802) (1,832) (1,961)


161


9. Income taxes (continued)

(a) Our deferred tax assets not recognised in the balance sheet may be used in future years if the following criteria are met:

• our controlled entities have sufficient future taxable profit to enable the income tax losses and temporary differences to be offset against that taxable profit;

• the Telstra Entity and our controlled entities have sufficient future capital gains to be offset against those capital losses;

• we continue to satisfy the conditions required by tax legislation to be able to use the tax losses; and

• there are no future changes in tax legislation that will adversely affect us in using the benefit of the tax losses.

As at 30 June 2006, the deferred tax assets not recognised in our balance sheet are able to be carried forward indefinitely for both our domestic and offshore operations, except in relation to one offshore controlled entity that has income tax losses of $9 million (fiscal 2005: $13 million) that will expire in fiscal 2027.

In the event of the further privatisation of our Company, certain income tax losses and capital tax losses, not currently recognised as a deferred tax asset, may not be able to be utilised in the future to offset income tax and capital tax gains for some offshore controlled entities and the tax consolidated group. The ability to utilise income and capital losses in the future will depend on various factors, including the number of shares the Commonwealth continues to hold, either directly or indirectly.

Tax consolidation

The Telstra Entity and its Australian resident wholly owned entities previously elected to form a tax consolidated group. As part of the election to enter tax consolidation, the tax consolidated group is treated as a single entity for income tax purposes.

The Telstra Entity, as the head entity in the tax consolidated group, recognises, in addition to its own transactions, the current tax liabilities and the deferred tax assets arising from unused tax losses and tax credits for all entities in the group. However, the Telstra Entity and its resident wholly owned entities account for their own current tax expense and deferred tax amounts.

Upon tax consolidation, the entities within the tax consolidated group entered into a tax sharing agreement. The terms of this agreement specified the methods of allocating any tax liability in the event of default by the Telstra Entity on its group payment obligations and the treatment where a subsidiary member exits the group. The tax liability of the group otherwise remains with the Telstra Entity for tax purposes.

During fiscal 2006, the entities within the tax consolidated group entered into a tax funding arrangement under which:

• the Telstra Entity compensates its wholly owned controlled entities for any current tax receivable assumed;

• the Telstra Entity compensates its wholly owned controlled entities for any deferred tax assets relating to unused tax losses and tax credits; and

• wholly owned entities compensate the Telstra Entity for any current tax payable assumed.

The funding amounts are based on the amounts recorded in the financial statements of the wholly owned entities.

Amounts receivable of $40 million to the Telstra Entity and amounts payable from the Telstra Entity of $194 million under the tax funding arrangements are due in the next financial year upon final settlement of the current tax payable for the tax consolidated group. During fiscal 2005, no tax funding arrangement was in place and as a result these funding amounts were recorded as equity contributions to or distributions from our controlled entities.


2006 2005 2006 2005$m $m $m $m

Deferred tax assets not recognised in the balance sheet (a):Income tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185 161 - -Capital tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 198 160 161Deductible temporary differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 353 334 192 99

734 693 352 260


162


(a) Bank deposits are held in the short term money market. The carrying amount of bank deposits, bills of exchange and commercial paper approximates net fair value due to their short term to maturity.

10. Cash and cash equivalents


2006 2005 2006 2005$m $m $m $m

CurrentCash at bank and on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 225 87 83Bank deposits, bills of exchange and commercial paper (a) . . . . . . . . . . . . . . . . . 451 1,323 387 1,285

689 1,548 474 1,368


163


(a) Our policy requires trade debtors to pay us in accordance with agreed payment terms. Depending on the customer segment, our settlement terms are generally 14 to 30 days from date of invoice.All credit and recovery risk associated with trade debtors has been provided for in the balance sheet.

(b) Our other receivables relates mainly to customer deferred debt. Our customer deferred debt allows eligible post paid customers the opportunity to repay the cost of their mobile handset and approved accessories monthly over 12, 18 or 24 months. The loan is provided interest free to our mobile postpaid customers.

(c) In fiscal 2006, amounts owed by jointly controlled and associated entities relates mainly to loans provided to Reach Ltd (Reach) of$210 million (2005: $204 million) and the 3GIS Partnership (3GIS) of$14 million (2005: $32 million). An allowance for the total loan provided to Reach has been recognised. Refer to note 33 for further details.

11. Trade and other receivables


2006 2005 2006 2005Note $m $m $m $m

CurrentTrade debtors (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,565 2,434 1,881 1,774Allowance for doubtful debts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (144) (159) (110) (125)

2,421 2,275 1,771 1,649

Amounts owed by controlled entities (other than trade debtors) . . . . . . . . . . . . .33 - - 2,267 2,194Allowance for amounts owed by controlled entities (other than trade debtors). . . .33 - - (1,851) (1,469)

- - 416 725

Accrued revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 976 971 929

Other receivables (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 262 298 195 235Allowance for doubtful debts (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) - (9) -

1,280 1,274 1,157 1,1643,701 3,549 3,344 3,538

Non currentAmounts owed by controlled entities (other than trade debtors) . . . . . . . . . . . . .33 - - 60 56

Amounts owed by jointly controlled and associated entities (c) . . . . . . . . . . . . .33 229 242 210 204Allowance for amounts owed by jointly controlled and associated entities (c) . . . .33 (215) (210) (210) (204)

14 32 - -

Other receivables (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 65 72 59Allowance for doubtful debts (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) - (5) -

73 65 67 5987 97 127 115


164


.

12. Inventories


2006 2005 2006 2005$m $m $m $m

CurrentFinished goods recorded at net realisable value . . . . . . . . . . . . . . . . . . . . . . . . 79 4 67 -Finished goods recorded at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 197 91 167Total finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202 201 158 167

Raw materials and stores recorded at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16 10 12Construction contracts (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 15 7 15

224 232 175 194

Non currentFinished goods recorded at net realisable value . . . . . . . . . . . . . . . . . . . . . . . . 15 - 15 -Finished goods recorded at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 15 5 15

20 15 20 15

(a) Construction contract disclosures are shown as follows:Contract costs incurred and recognised profits . . . . . . . . . . . . . . . . . . . . . . . . . 108 69 108 69Progress billings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (101) (54) (101) (54)

7 15 7 15

Advances received for construction work in progress (included in trade and other payables) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7 7 7


165


13. Investments


2006 2005 2006 2005Note $m $m $m $m

Investments - accounted for using the equity method

Investments in jointly controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 40 2 83Allowance for impairment in value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (4) (2) (50)Carrying amount of investments in jointly controlled entities . . . . . . . . . . . . . .30 2 36 - 33

Investments in associated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 36 18 33Allowance for impairment in value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (24) (24) - (25)Carrying amount of investments in associated entities . . . . . . . . . . . . . . . . . . .30 21 12 18 8

23 48 18 41

Investments - other

Investments in controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29 - - 13,062 12,975Allowance for impairment in value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (7,109) (6,839)Total investments in controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 5,953 6,136


166


14. Property, plant and equipment


2006 2005 2006 2005$m $m $m $m

Land and site improvementsAt cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 40 32 37

Buildings (including leasehold improvements)At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 822 706 722Accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (392) (392) (352) (356)

430 430 354 366

Communication assets (including leasehold improvements)At cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,848 43,217 43,222 41,127Accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (23,398) (21,541) (22,393) (20,946)

22,450 21,676 20,829 20,181

Communication assets under finance leaseAt cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 858 858 858 858Accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (501) (434) (501) (434)

357 424 357 424

Other plant, equipment and motor vehiclesAt cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068 1,011 692 753Accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (740) (710) (519) (554)

328 301 173 199

Equipment under finance leaseAt cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 52 33 26Accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (38) (32) (13) (10)

22 20 20 16

Total property, plant and equipmentAt cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,691 46,000 45,543 43,523Accumulated depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25,069) (23,109) (23,778) (22,300)

23,622 22,891 21,765 21,223


167


14. Property, plant and equipment (continued)


2006 2005 2006 2005Note $m $m $m $m

Land and site improvements

Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 43 37 42- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 4 - 3- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5) (8) (5) (8)- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . - 1 - -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 40 32 37

Buildings (including leasehold improvements)

Opening net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 393 366 376

Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 733 722 689- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 47 60 43- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (104) (16) (98) (15)- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 10 55 - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (6) - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 9 22 5Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 822 822 706 722

Opening accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (392) (340) (356) (313)- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 4 70 3- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . (1) - - -- depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (62) (54) (54) (47)- impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) - (6) -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (5) (6) 1Closing accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (392) (392) (352) (356)

Closing net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 430 430 354 366


168


(a) Includes certain network land and buildings which are essential to the operation of our communication assets.

(b) During fiscal 2006 and fiscal 2005, there were no additions or disposals to this class of asset. As a result, our opening and closing cost has remained unchanged.



2006 2005 2006 2005Note $m $m $m $m

Communication assets (including leasehold improvements) (a)

Opening net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,676 21,093 20,181 20,095

Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43,217 40,575 41,127 39,093- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,681 3,378 3,501 2,732- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,416) (740) (1,432) (740)- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 421 - - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (105) (37) - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 41 26 42Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,848 43,217 43,222 41,127

Opening accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (21,541) (19,482) (20,946) (18,998)- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,376 584 1,393 588- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . (265) - - -- depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (2,953) (2,615) (2,786) (2,508)- impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (37) (14) (37) (14)- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 8 - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (22) (17) (14)Closing accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (23,398) (21,541) (22,393) (20,946)

Closing net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,450 21,676 20,829 20,181

Communication assets under finance lease


Opening and closing cost (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 858 858 858 858

Opening accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (434) (359) (434) (359)- depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (67) (75) (67) (75)Closing accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (501) (434) (501) (434)



169




2006 2005 2006 2005Note $m $m $m $m

Other plant, equipment and motor vehicles


Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,011 1,335 753 1,004- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 114 34 52- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111) (301) (96) (295)- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 48 15 - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (14) - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (138) 1 (8)Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,068 1,011 692 753

Opening accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (710) (955) (554) (793)- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 287 85 281- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . (37) - - -- depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (93) (123) (45) (50)- impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (26) (3) (26) (3)- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 9 - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 75 21 11Closing accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (740) (710) (519) (554)


Equipment under finance lease


Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 48 26 20- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 13 9 11- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (9) - (5)- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . - 4 - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) - - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (4) (2) -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 52 33 26

Opening accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (32) (37) (10) (10)- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3 - -- depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (8) (9) (6) (7)- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 11 3 7Closing accumulated depreciation/impairment . . . . . . . . . . . . . . . . . . . . . . . . (38) (32) (13) (10)



170


Work in progress

In fiscal 2006, the Telstra Group has property, plant and equipment under construction amounting to $1,695 million (2005: $1,040 million). In fiscal 2006, the Telstra Entity has property, plant and equipment under construction amounting to $1,596 million (2005: $945 million). As these assets are not installed and ready for use, there is no depreciation being charged on these amounts.

Other

Details of our expenditure and lease commitments in relation to property, plant and equipment are shown in note 26 to these financial statements.

In fiscal 2006, the Telstra Group has property, plant and equipment that was fully depreciated and still in use with a cost of $1,767 million (2005: $2,224 million). In fiscal 2006, the Telstra Entity has property, plant and equipment that was fully depreciated and still in use with a cost of $1,412 million (2005: $1,905 million).



171


15. Intangible assets


2006 2005 2006 2005$m $m $m $m

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,073 2,037 16 16

Internally generated intangible assetsSoftware assets developed for internal use . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,188 3,622 2,651 3,173Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,406) (1,652) (1,171) (1,499)

1,782 1,970 1,480 1,674Acquired intangible assetsMastheads . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 447 - -

Patents and trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 34 20 20Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (6) (11) (7)

26 28 9 13

Licences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833 793 267 267Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (241) (183) (132) (116)

592 610 135 151

Brandnames . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 215 - -Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (42) - -

182 173 - -

Customer bases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 846 749 70 70Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (407) (305) (64) (51)

439 444 6 19Total acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,686 1,702 150 183

Deferred expenditureDeferred expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589 1,272 1,841 1,533Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,007) (652) (1,022) (655)

582 620 819 878Total intangiblesAt cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,245 9,169 4,865 5,079Accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,122) (2,840) (2,400) (2,328)

6,123 6,329 2,465 2,751


172


Movements in intangible assets

15. Intangible assets (continued)


2006 2005 2006 2005Note $m $m $m $m

Goodwill

Opening value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,037 1,790 16 16- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . .24 324 385 - -- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (312) - - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 (138) - -- impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) - - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) - - -Closing value (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,073 2,037 16 16

Intangibles - internally generated

Software assets developed for internal use (b)

Opening net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,970 1,882 1,674 1,698

Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,622 3,249 3,173 3,005- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 602 552 498 470- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 1 15 - -- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (969) (310) (965) (302)- impairment losses (f) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (65) - (64) -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (10) - - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 116 9 -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,188 3,622 2,651 3,173

Opening accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,652) (1,367) (1,499) (1,307)- amortisation expense (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (726) (510) (629) (472)- disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 969 310 965 302- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 - - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (85) (8) (22)Closing accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,406) (1,652) (1,171) (1,499)

Closing net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,782 1,970 1,480 1,674

Acquired Intangible assets

Mastheads

Opening net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 448 - -

Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 448 - -- impairment losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1) - -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 447 - -

Closing net book value (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 447 447 - -


173


Movements in intangible assets (continued)



2006 2005 2006 2005Note $m $m $m $m

Patents and trademarks


Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 7 20 20- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - - -- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . - 27 - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) - - -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34 34 20 20

Opening accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) (4) (7) (3)- amortisation expense (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (2) (2) (4) (4)Closing accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (8) (6) (11) (7)


Licences


Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 793 801 267 267- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 5 2 -- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 23 5 - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (18) - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - (2) -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 833 793 267 267

Opening accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (183) (150) (116) (98)- amortisation expense (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (58) (37) (18) (18)- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) - 2 -Closing accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (241) (183) (132) (116)



174





2006 2005 2006 2005Note $m $m $m $m

Brandnames

Opening net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 180 - -

Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 215 - -- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 21 16 - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (16) - -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235 215 - -

Opening accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (42) (35) - -- amortisation expense (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (11) (10) - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3 - -Closing accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (53) (42) - -

Closing net book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 173 - -

Customer bases


Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 749 593 70 70- additions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 - - -- acquisitions through business combinations . . . . . . . . . . . . . . . . . . . . . . . . . 76 191 - -- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (35) - -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 846 749 70 70

Opening accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (305) (240) (51) (36)- amortisation expense (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 (98) (86) (13) (15)- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) 21 - -Closing accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (407) (305) (64) (51)



175



Details of our expenditure commitments in relation to our intangible assets are shown in note 26 to our financial statements.

(a) We allocate goodwill to our relevant cash generating units (CGU’s) for the purposes of impairment testing. Refer to note 25 for further details.

(b) In fiscal 2006, the Telstra Group had software assets under development amounting to $352 million (2005: $362 million). In fiscal 2006, the Telstra Entity had software assets under development amounting to $296 million (2005: $301 million). As these assets were not installed and ready for use there is no amortisation being charged on the amounts.

(c) We do not currently amortise the cost of our mastheads as they have been assessed to have an indefinite useful life. We do not expect there to be a foreseeable limit to the period over which the mastheads are expected to generate net cash inflows and, based on industry experience and current information, it is extremely rare for leading mastheads to become commercially or technically obsolete. We believe we could dispose of the mastheads in the foreseeable future for an amount not less than the current carrying value and that the acquirer could retain the strong market position that the mastheads currently represent.

(d) During fiscal 2005, we entered into an arrangement with our jointly controlled entity, Reach Ltd (Reach), and our co-shareholder PCCW, whereby Reach’s international cable capacity was allocated between us and PCCW under an indefeasible right of use (IRU) agreement, including committed capital expenditure for the period until 2022.

The IRU is amortised over the contract periods for the capacity on the various international cable systems, which range from 5 to 22 years. The Telstra Entity has recorded the IRU within deferred expenditure. For the Telstra Group, the IRU was deemed to be an extension of our investment in Reach. The IRU has a carrying value of $nil in the consolidated financial statements due to the recognition of equity accounted losses in Reach.

(e) Amortisation expense is included in depreciation and amortisation expense in the income statement, with the exception of items of deferred expenditure which are expensed to the relevant line of the income statement. The majority of the deferred expenditure relates to the deferral of basic access installation costs, which are amortised to goods and services purchased in the income statement.

(f) We have recognised impairment losses relating to project costs that were included in our capitalised software and relate to our software work-in-progress. These projects have subsequently been cancelled and the costs recognised in the income statement as an impairment loss.



2006 2005 2006 2005$m $m $m $m

Deferred expenditure


Opening cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,272 1,031 1,533 988- additions (d). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 241 315 545- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - (7) -Closing cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589 1,272 1,841 1,533

Opening accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (652) (395) (655) (395)- amortisation expense (e). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (355) (257) (367) (260)Closing accumulated amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,007) (652) (1,022) (655)



176


Refer to note 35 for details on the financial risk management of our derivative financial instruments.

The transitional rules for first time adoption of A-IFRS required that we restate our comparative financial report using A-IFRS, except for AASB 132: “Financial Instruments: Disclosure and Presentation” and AASB 139: “Financial Instruments: Recognition and Measurement”, where comparative information was not required to be restated. Accordingly, we have applied previous AGAAP in the comparative information.

16. Derivative financial assets


2006 2005 2006 2005$m $m $m $m

CurrentCross currency swap hedge receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4 20 4Forward contract asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 1 -

21 4 21 4

Non currentCross currency swap hedge receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 - 222 -Interest rate swap asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 - 169 -

391 - 391 -


177


(a) Trade creditors and other creditors are non interest bearing liabilities. We generally process trade creditor payments once they have reached 30 days from the date of invoice for electronic funds transfer payments, or 30 days from the end of the month of invoice for other payments.

(b) Included in our deferred cash settlement for acquisitions are our remaining obligations for the purchase of the third generation radio access network assets from Hutchison 3G Australia Pty Ltd.

During fiscal 2005, we purchased these assets for an amount of $450 million, payable over two years. We recognised this payable at its present value in our balance sheet of $403 million and are releasing the associated financing cost over the period of the payablein the income statement. For fiscal 2006, this release of finance costs amounted to $19 million (2005: $28 million).

17. Trade and other payables


2006 2005 2006 2005Note $m $m $m $m

CurrentTrade creditors (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738 649 586 480Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,338 1,044 1,081 815Accrued capital expenditure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 844 289 772 210Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 227 258 227Deferred cash settlement for acquisitions (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 123 316 - -Other creditors (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 282 171 219Amounts owed to controlled entities (other than trade creditors) . . . . . . . . . . . .33 - - 197 5

3,570 2,807 3,065 1,956

Non currentDeferred cash settlement for acquisitions (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 127 187 - -Other creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 63 65 61

197 250 65 61


178


18. Borrowings


2006 2005 2006 2005Note $m $m $m $m

CurrentShort term debtBank overdraft (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14 - -Bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 - 110 -Bills of exchange and commercial paper (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,457 449 1,457 449Loans from wholly owned controlled entities . . . . . . . . . . . . . . . . . . . . . . . . .33 - - 1,408 2,400

1,568 463 2,975 2,849

Long term debt - current portionTelstra bonds (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 516 - 516Other loans (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 523 394 523Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 7 5 5 4

401 1,044 399 1,0431,969 1,507 3,374 3,892

Non currentLong term debtTelstra bonds (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613 2,605 2,613 2,605Other loans (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,748 8,289 8,748 8,289Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 48 47 15 13

11,409 10,941 11,376 10,907

Total debt payableShort term debtBank overdraft (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 14 - -Bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 - 110 -Bills of exchange and commercial paper (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,457 449 1,457 449Loans from wholly owned controlled entities . . . . . . . . . . . . . . . . . . . . . . . . .33 - - 1,408 2,400

1,568 463 2,975 2,849

Long term debt (including current portion)Telstra bonds (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613 3,121 2,613 3,121Other loans (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,142 8,812 9,142 8,812Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26 55 52 20 17

11,810 11,985 11,775 11,95013,378 12,448 14,750 14,799


179


Our long term debt is repayable over years ending 30 June as follows:

Assets pledged as security

Our 50% owned pay television joint venture FOXTEL previously entered into a $550 million bank facility arrangement to fund its full digital conversion and launch of new digital services. The use of this facility is subject to certain conditions being met and full repayment is due on 30 September 2008.

As part of this arrangement, our controlled entity Telstra Media Pty Ltd as a FOXTEL partner, and FOXTEL itself, have pledged their respective assets as collateral in favour of the banks. The carrying value of the assets pledged in Telstra Media Pty Ltd as at 30 June 2006 was $nil (2005: $nil). Refer to note 27 for details of an equity contribution deed entered as part of this agreement.

On 31 July 2006, FOXTEL entered into a $600 million syndicated secured term loan facility to fund the refinancing of the above facility. Refer to note 34 for further details.

Our borrowings are unsecured, except for finance leases which are secured, as the rights to the leased asset transfer to the lessor in the event of a default by us.

(a) Bank overdraft

As at 30 June 2006, we had a bank overdraft of $nil (2005: $14 million). Our bank overdraft in fiscal 2005 related to a controlled entity. This bank overdraft was unsecured, with interest being charged daily, net of the controlled entity’s offsetting position of cash in bank and any outstanding loans.

(b) Bills of exchange and commercial paper

We have issued bills of exchange and commercial paper of $1,457 million (2005: $449 million) to financial institutions with an original maturity of less than 180 days. At 30 June 2006, all $1,457 million (2005: $449 million) of the commercial paper matures in less than three months.

(c) Telstra bonds

Telstra bonds currently on issue relate to wholesale investors and mature up until the year 2020. During fiscal 2006, $508 million (2005: $273 million) of Telstra bonds matured.

18. Borrowings (continued)

Telstra GroupDue in the year ending 30 June 2007 2008 2009 2010 2011 after 2011 TotalTelstra bonds $m $m $m $m $m $m $mCoupon interest rateup to 6.0% . . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - 35 35up to 8.0% . . . . . . . . . . . . . . . . . . . . . . . . . . - - 500 500 - 1,510 2,510up to 10.0% . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - 28 28up to 12.0% . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - 44 44up to 16.0% . . . . . . . . . . . . . . . . . . . . . . . . . - - - - - 32 32

- - 500 500 - 1,649 2,649Unamortised discount . . . . . . . . . . . . . . . . . . (36)

2,613

Other loans (d) . . . . . . . . . . . . . . . . . . . . . . . 394 1,373 81 815 2,642 3,837 9,142Unamortised discount . . . . . . . . . . . . . . . . . . -

9,142

Finance leases . . . . . . . . . . . . . . . . . . . . . . . 13 12 10 8 5 52 100Future finance charges . . . . . . . . . . . . . . . . . . (45)

55

Total long term debt payable . . . . . . . . . . . . . . 407 1,385 591 1,323 2,647 5,538 11,891Unamortised discount . . . . . . . . . . . . . . . . . . (81)

11,810


180


(d) Other loans

Details of our other loans, including currency of borrowing, interest rates and maturity dates, are presented in the table below:

(e) Financing arrangements

We have commercial paper facilities in place with financial institutions under which we may issue up to $14,651 million (2005: $13,842 million). As at 30 June 2006, we had drawn down $1,457 million (2005: $449 million) of these commercial paper facilities. These facilities are not committed or underwritten and we have no guaranteed access to the funds.

Generally, our facilities are available unless we default on any terms applicable under the relevant agreements or become insolvent.

18. Borrowings (continued)

Telstra Group - Other loans details A$ amount Interest rates Maturity datesAs at 30 June Year ended 30 June As at 30 June

2006 2005 2006 2005 2006 2005A$m A$m % %

Australian dollar loans . . . . . . . . . . . . . . . 245 247 5.93 5.93 November 2007 November 2007US dollar loans . . . . . . . . . . . . . . . . . . . . 1,028 1,306 5.22 to 6.47 3.49 to 6.50 between April 2008

and Dec 2015between Nov 2005

and April 2012Euro eurobond loan . . . . . . . . . . . . . . . . . 6,336 5,893 3.14 to 6.49 3.00 to 6.38 between Dec 2006

and July 2015between Dec 2006

and July 2015Swiss franc eurobond loan. . . . . . . . . . . . . 326 304 2.61 2.50 April 2013 April 2013Japanese yen loans . . . . . . . . . . . . . . . . . 472 333 0.44 to 2.51 0.31 to 1.89 between July 2007

and June 2016between July 2007

and Nov 2014Singapore dollar loans . . . . . . . . . . . . . . . 84 78 3.80 3.80 March 2008 March 2008New Zealand dollar loans . . . . . . . . . . . . . 164 183 7.03 to 7.19 6.99 to 7.15 between Nov 2011

and Nov 2014between Nov 2011

and Nov 2014British pound sterling loans . . . . . . . . . . . . 487 468 6.23 6.13 August 2014 August 2014Total other loans including current portion . . 9,142 8,812


2006 2005 2006 2005$m $m $m $m

We have access to the following lines of credit:

Credit standby arrangementsUnsecured committed cash standby facilities which are subject to annual review . . . 902 892 894 887Amount of credit unused. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900 891 894 887


181


(i) Accrued labour and related on-costs are included within our current trade and other payables (refer to note 17).

Provision for employee benefits consist of amounts for annual leave and long service leave accrued by employees.

Non current employee benefits for long service leave are measured at their present value. The following assumptions were adopted in measuring this amount:

19. Provisions


2006 2005 2006 2005$m $m $m $m

CurrentEmployee benefits (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 336 272 288Workers' compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 32 31 31Provision for restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81 - 81 -Provision for redundancies (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 - 155 -Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147 53 140 37

737 421 679 356

Non currentEmployee benefits (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 573 610 548 588Workers' compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184 182 177 175Provision for restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128 - 128 -Provision for redundancies (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 - 28 -Other provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 102 43 74

974 894 924 837

(a) Aggregate employee benefits and related on-costs liabilityCurrent provision for employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 319 336 272 288Non current provision for employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 573 610 548 588Current provision for redundancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158 - 155 -Non current provision for redundancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 - 28 -Accrued labour and on-costs (i). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317 237 303 225

1,395 1,183 1,306 1,101


2006 2005 2006 2005

Weighted average projected increase in salaries, wages and associated on-costs . . . . . 4.2% 4.0% 4.3% 4.0%Weighted average discount rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4% 5.4% 5.4% 5.4%Leave taking rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2% 13.3% 13.3% 13.3%


182


(b) Information about our provisions, other than provision for employee benefits

Workers’ compensation

We self insure for our workers’ compensation liabilities. We provide for our obligations through an assessment of accidents and estimated claims incurred. The provision is based on a semi-annual actuarial review of our workers’ compensation liability. Actual compensation paid may vary where accidents and claims incurred vary from those estimated. The timing of these payments may vary, however the average time payments are expected for is 11 years (2005: 12 years).

Certain controlled entities do not self insure, but pay annual premiums to third party insurance companies for their workers’ compensation.

Provision for redundancy and restructuring

The provision for redundancy and restructuring relates to our transformation project that was announced on 15 November 2005.A provision has only been raised for those redundancy and restructuring costs where a detailed formal plan has been approved and we have raised a valid expectation in those affected that the plan will be carried out. Only those costs that are not associated with the ongoing activities of the Company have been included. The costs included in the redundancy and restructuring provision are based on current estimates of the likely amounts to be incurred and include:

• an estimate of the termination benefits that affected employees will be entitled to;

• costs associated with shutting down certain networks, platforms and applications;

• property rationalisation and other onerous lease costs; and• costs of replacing customer equipment in order to meet our current

service obligations.

A total provision of $427 million has been raised for redundancy and restructuring for the Telstra Group as at 30 June 2006. This includes $18 million for the additional impairment of inventory and a$14 million allowance for other receivables. Refer to note 7(b) for further details.

The execution of these detailed formal plans, for which a restructuring and redundancy provision has been raised, is expected to be completed by fiscal 2011 for the restructuring provision, and fiscal 2008 for the redundancy provision.

Other

Other provisions include provision for Reach Ltd’s committed capital expenditure, provision for restoration costs, and other general provisions.

19. Provisions (continued)


183


(c) Movement in provisions, other than employee benefits

19. Provisions (continued)


2006 2005 2006 2005$m $m $m $m

Workers' compensation

Opening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 216 206 207- additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 22 23 22- amount used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32) (32) (31) (31)- unwinding of discount on liabilities recognised at present value . . . . . . . . . . . . . 11 11 11 11- effect of any change in the discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) (3) (1) (3)Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216 214 208 206

Restructuring provision

Opening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 3 - 3- additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 - 209 -- reversal of amounts unused . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (3) - (3)Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 209 - 209 -

Redundancy provision

Opening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -- additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 - 183 -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186 - 183 -

Other

Opening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155 46 111 24- additional provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 125 113 93- amount used . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (51) (12) (38) (5)- reversal of amounts unused . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) (10) (16) (3)- unwinding of discount on liabilities recognised at present value . . . . . . . . . . . . . 9 2 9 2- foreign currency exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) - - -- other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 4 4 -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 208 155 183 111


184


Refer to note 35 for details on the financial risk management of our derivative financial instruments.


20. Derivative financial liabilities


2006 2005 2006 2005$m $m $m $m

CurrentCross currency swap hedge payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 11 6 11Forward contract liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - 6 -

12 11 12 11

Non currentCross currency swap hedge payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612 864 612 864Interest rate swap payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 - 156 -

768 864 768 864


185


Contributed equity

Our contributed equity represents our authorised fully paid ordinary shares. Each of our fully paid ordinary shares carries the right to one vote at a meeting of the company. Holders of our shares also have the right to receive dividends as declared, and to participate in the proceeds from sale of all surplus assets in proportion to the total shares issued in the event of the company winding up.

The movement in the number of our authorised fully paid ordinary

shares is:

(i) On 15 November 2004, we completed an off-market share buy-back of 185,284,669 ordinary shares as part of our capital management program. The ordinary shares were bought back at $4.05 per share, comprising a fully franked dividend component of $2.55 per share and a capital component of $1.50 per share. The Commonwealth of Australia did not participate in the share buy-back.

The shares bought back were subsequently cancelled, reducing the number of fully paid ordinary shares on issue. In total, 1.47% of our total issued ordinary shares, or 3.0% of our non Commonwealth owned ordinary shares, were bought back.

The cost of the share buy-back comprised a purchase consideration of $750 million and associated transaction costs of $6 million.

In accordance with the substance of the buy-back, shareholders’ equity decreased as follows:

Share loan to employees

The share loan to employees account represents the outstanding balance of the non recourse loans provided to our employees under the Telstra Employee Share Ownership Plans (TESOP 97 and TESOP 99).

Shares held by employee share plan trusts

The shares held by employee share plan trusts account represents the value of shares held by the Telstra Growthshare Trust (Growthshare) in Telstra Corporation Limited. The purchase of these shares has been fully funded by Telstra Corporation Limited. As at 30 June 2006 the number of shares totalled 17,931,918 (2005: 20,216,091).

Net services received under employee share plans

The net services received under employee share plans account is used to record the cumulative value of our incentive shares, options, restricted shares, performance rights and deferred shares issued under Growthshare. Contributions by Telstra Corporation Limited to Growthshare are also included in this account. These contributions are used by the Trust to purchase Telstra shares on market to underpin the issue of our equity instruments.

21. Share capital


2006 2005 2006 2005$m $m $m $m

Contributed equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,793 5,793 5,793 5,793Share loan to employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130) (154) (130) (154)Shares held by employee share plan trusts . . . . . . . . . . . . . . . . . . . . . . . . . . . (99) (113) (99) (113)Net services received under employee share plans. . . . . . . . . . . . . . . . . . . . . . . 5 10 5 10

5,569 5,536 5,569 5,536


2006 2005

Number of sharesNumber of

shares

Opening balance. . . . . . . . . 12,443,074,357 12,628,359,026Shares bought back (i) . . . . . . - (185,284,669)Closing balance . . . . . . . . . 12,443,074,357 12,443,074,357

Year ended 30 June

2005$m

Contributed equity . . . . . . . . . . . . . . . . . . . . . . 280Retained profits . . . . . . . . . . . . . . . . . . . . . . . . 476

756


186


Movements in our share capital

21. Share capital (continued)


2006 2005 2006 2005Note $m $m $m $m

Share capital

Contributed equityOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,793 6,073 5,793 6,073- share buy-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (280) - (280)Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,793 5,793 5,793 5,793

Share loan to employeesOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (154) (174) (154) (174)- amounts repaid on share loans provided to employees . . . . . . . . . . . . . . . . . . . 24 20 24 20Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (130) (154) (130) (154)

Shares held by employee share plan trustsOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (113) (117) (113) (117)- additional shares purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6) - (6) -- shares issued to employees under employee share plans. . . . . . . . . . . . . . . . . . 20 4 20 4Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (99) (113) (99) (113)

Net services received under employee share plansOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4 10 4- share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 15 10 15 10- shares issued to employees under employee share plans. . . . . . . . . . . . . . . . . . (20) (4) (20) (4)Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 10 5 10

5,569 5,536 5,569 5,536


187


Foreign currency translation reserve

The foreign currency translation reserve is used to record exchange differences arising from the conversion of the financial statements into Australian dollars.

This reserve is also used to record our percentage share of exchange differences arising from equity accounting our non-Australian investments in jointly controlled entities and associated entities.The foreign currency translation reserve applicable to jointly controlled and associated entities is shown in note 30.

Cash flow hedging reserve

The cash flow hedging reserve represents, where a hedge qualifies for hedge accounting, the effective portion of gains or losses on remeasuring the fair value of the hedge instrument until such time as the hedged item affects the income statement. At this time the gains or losses are transferred to the income statement.


Consolidation fair value reserve

The consolidation fair value reserve represents our share of the fair value adjustments to TelstraClear Limited net assets upon acquisition of a controlling interest. The reserve balance is amortised over the useful life of the underlying revalued assets.

General reserve

The general reserve represents other items we have taken directly to equity.

22. Reserves


2006 2005 2006 2005$m $m $m $m

Foreign currency translation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210) (195) - -Cash flow hedging reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 - 16 -Consolidation fair value reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 38 - -General reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 194 194

(160) (153) 210 194


188


Movements in our reserves

(i) Adjustment on adoption of AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139: “Financial Instruments: Recognition and Measurement” from 1 July 2005. Refer to note 36 for further details.

22. Reserves (continued)


2006 2005 2006 2005Note $m $m $m $m

Reserves

Foreign currency translation reserveOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (195) - - -- reserves recognised on equity accounting our interest in jointly controlledand associated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (2) - -- adjustment on translation of financial statements of non-Australiancontrolled entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (36) (193) - -- transfer of foreign currency translation reserve on sale of jointly controlled entity . 1 - - -- reduction on dilution of ownership of Telstra CSL Limited . . . . . . . . . . . . . . . .24 19 - - -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (210) (195) - -

Cash flow hedging reserveOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - -- adjustment to opening balance on adoption of new accounting standard (i) . . . . . 79 - 82 -Adjusted opening balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 - 82 -- net hedging gains recognised directly in equity. . . . . . . . . . . . . . . . . . . . . . . . 327 - 327 -- net hedging gains removed from equity and included in profit for the year . . . . . . (420) - (421) -- income tax on cash flow hedging reserve. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 - 28 -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 - 16 -

Consolidation fair value reserveOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 44 - -- transfers to retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .23 (6) (6) - -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 38 - -

General reserveOpening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 5 194 194- reserves recognised on equity accounting our interest in jointly controlled and associated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 5 - -- transfer of reserve on sale of associates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (6) - -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 4 194 194

(160) (153) 210 194


189


(i) Adjustment on adoption of AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139: “Financial Instruments: Recognition and Measurement” from 1 July 2005. Refer to note 36 for further details.

(ii) Dilution gain represents net gain recognised on the merger of the Telstra CSL Group and New World Mobility Group. Refer to note 24 for details.

23. Retained profits and minority interests


2006 2005 2006 2005Note $m $m $m $m

Retained profits

Opening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,273 8,618 7,413 7,558- adjustment to opening balance on adoption of new accounting standard (i) . . . . . (5) - (5) -Adjusted opening balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,268 8,618 7,408 7,558- profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 4,309 3,237 4,516- actuarial gain/(loss) on our defined benefit plans . . . . . . . . . . . . . . . . . . . . . . 958 (90) 945 (85)- income tax on our actuarial gain on our defined benefit plans . . . . . . . . . . . . . . (284) 24 (284) 24- dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 (4,970) (4,124) (4,970) (4,124)- share buy-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 - (476) - (476)- transfers from consolidation fair value reserve . . . . . . . . . . . . . . . . . . . . . . .22 6 6 - -- transfer of reserve on sale of associates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 6 - -- dilution gain recognised on CSL New World Mobility Group merger (ii) . . . . . . . .24 18 - - -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,177 8,273 6,336 7,413

Minority interest

Opening balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 2 - -- increase in minority interests due to acquisitions. . . . . . . . . . . . . . . . . . . . . . . 244 - - -Closing balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246 2 - -


190


24. Notes to the statement of cash flows


2006 2006 2005 2006 2005Note $m US$m $m $m $m

(a) Reconciliation of profit to net cash provided by operating activities

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 2,362 4,309 3,237 4,516Add/(subtract) the following transactionsDepreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4,087 3,034 3,529 3,657 3,206Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 (66) (49) (83) (63) (101)Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 1,002 744 963 985 943Dividend revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - - - (560) (224)Share based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 15 11 10 15 10Defined benefit expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 185 137 203 182 201Net gain on disposal of property, plant and equipment . . . . . . . . . . 6 (23) (17) (9) (20) (10)Net gain on disposal of controlled entities. . . . . . . . . . . . . . . . . . . 6 (4) (3) - - -Net gain on disposal of other investments. . . . . . . . . . . . . . . . . . . 6 (58) (43) (79) (59) (85)Share of net (gain)/loss from jointly controlled and associated entities 30 (5) (4) 94 - -Impairment losses (excluding inventories, trade and other receivables) 7 137 102 29 760 519Reversal of impairment losses (excluding trade and other receivables) . . - - - (15) (349)Decrease in non cash receivable from related entity . . . . . . . . . . . . . . - - - - (361)Foreign exchange differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 21 (25) (46) 4Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 (52) 9 (20)Movements in operating assets and liabilities(net of acquisitions of controlled entity balances)(Increase)/decrease in trade and other receivables . . . . . . . . . . . . . . . (140) (104) 43 (204) 62(Increase)/decrease in inventories . . . . . . . . . . . . . . . . . . . . . . . . . 10 7 9 14 7(Increase)/decrease in prepayments and other assets . . . . . . . . . . . . . 30 22 (23) 20 (26)Increase/(decrease) in trade and other payables . . . . . . . . . . . . . . . . 243 180 (8) 517 25Increase/(decrease) in revenue received in advance . . . . . . . . . . . . . . 55 41 (13) 23 10Increase/(decrease) in net taxes payable . . . . . . . . . . . . . . . . . . . . . (502) (373) 32 (537) 193Increase/(decrease) in provisions. . . . . . . . . . . . . . . . . . . . . . . . . . 383 285 31 396 32Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . 8,562 6,356 8,960 8,311 8,552

(b) Reconciliation of cash balancesCash at the end of the year as shown in the statement ofcash flows agrees to the net amount of the followingitems in the notes to the financial statements:Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 689 511 1,548 474 1,368Bank overdraft . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 - - (14) - -

689 511 1,534 474 1,368


191


(c) Goods and Services Tax (GST)

Our receipts from trade and other receivables includes estimated GST of $2,223 million (2005: $2,121 million) collected by us as agent for the ATO. Our payments of accounts payable and to employees include estimated GST payments made by us for goods and services obtained in undertaking both operating and investing activities. GST paid associated with operating activities amounted to $941 million (2005: $784 million) and GST paid relating to investing activities amounted to $159 million (2005: $243 million).

(d) Significant financing and investing activities that involve components of non cash

Acquisition of 3G assets

During fiscal 2005, we acquired a 50% interest in Hutchison 3G Australia Pty Ltd’s existing third generation (3G) radio access network amounting to $403 million at acquisition date. As at 30 June 2006, we have paid an additional $312 million (2005: $22 million) to our joint venture partner for the acquisition of these assets as the purchase price is being paid in instalments. The balance outstanding as at 30 June 2006 was settled on 3 July 2006 and is reflected in our trade and other payables. Refer to note 17 for further information.

(e) Acquisitions

CSL New World Mobility Group

We merged our 100% owned Hong Kong mobile operations (Telstra CSL Group) with the Hong Kong mobile operations of New World PCS Holdings Limited and its controlled entities (New World Mobility Group) to form the CSL New World Mobility Group.

Under the merger agreement, Telstra CSL Limited (Telstra CSL) issued new shares to New World Mobility Holdings Limited in return for 100% of the issued capital of the New World Mobility Group and $44 million in cash. The share issue diluted Telstra’s ownership in the merged group to 76.4%. The effect on the Telstra Group of the merger is detailed below:

24. Notes to the statement of cash flows (continued)

New World Mobility Group

2006 2006$m $m

Consideration for acquisition

Fair value of Telstra CSL shares issued 577Cash received on acquisition . . . . . . (44)Total purchase consideration . . . . . 533

Fair value Carrying valueAssets/(liabilities) at acquisition dateTrade and other receivables . . . . . . 21 21Inventories. . . . . . . . . . . . . . . . . 4 4Property, plant and equipment . . . . 174 174Intangible assets . . . . . . . . . . . . . 109 -Other assets . . . . . . . . . . . . . . . . 14 14Deferred tax assets . . . . . . . . . . . . 21 29Trade and other payables . . . . . . . (97) (75)Net identifiable assets acquired . . . . 246 167Goodwill on acquisition. . . . . . . . . 287

533

Profit from acquisition date until30 June 2006. . . . . . . . . . . . . . . . 1


192


(e) Acquisitions (continued)

CSL New World Mobility Group (continued)

The net impact of the merger on the Telstra Group results at the date

of merger are detailed below.

The CSL New World Mobility Group is a provider of mobile telecommunication products and services which operates primarily in Hong Kong. Refer to note 29 for further details on the acquisition.

Other fiscal 2006 acquisitions

During fiscal 2006, we have also acquired several other entities. These entities are not individually significant and have been aggregated as

‘Other’ in the below table.

Our other acquisitions include:

• 100% of the issued share capital of the Converged Networks Group;• additional 25% interest in the issued share capital of Invizage Pty

Ltd giving us 100% ownership of this entity; • additional 40% interest in the issued share capital of Enhanced

Processing Technologies Inc giving us 100% ownership of this entity; and

• additional 24.7% interest in the issued share capital of Adstream (Aust) Pty Ltd and its controlled entities giving us a controlling 58% interest.

These entities are not individually significant and have been aggregated as ‘Other’. Refer to note 29 for further details on our acquisitions.


Year ended30 June

2006$m

Net increase in Telstra Group net assets Inflow of cash on acquisition (net of transaction costs) 42New World Mobility Group net identifiable assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 246Goodwill on acquisition of New World Mobility Group 287Reduction of Telstra CSL goodwill on dilution . . . . . (308)

267Represented by the following movements in equityMinority interest recognised . . . . . . . . . . . . . . . . (230)Reduction in foreign currency translation reserve on dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19)Dilution gain recognised as a result of merger . . . . . 18

Other

2006 2006$m $m

Consideration for acquisitions

Cash consideration for acquisitions . . 31Costs of acquisitions . . . . . . . . . . . 2Total purchase consideration . . . . . 33

Payments of deferred consideration for prior years’ acquisition . . . . . . . 10Outflow of cash on acquisition . . . . . 43

Fair value Carrying valueAssets/(liabilities) at acquisition dateTrade and other receivables. . . . . . . 5 5Property, plant and equipment . . . . 2 2Intangible assets - goodwill . . . . . . . 26 26Intangible assets - other . . . . . . . . . 12 -Provisions . . . . . . . . . . . . . . . . . . (3) (3)Deferred tax liabilities . . . . . . . . . . (4) -Other liabilities . . . . . . . . . . . . . . - (2)Net assets . . . . . . . . . . . . . . . . . . 38 28Adjustment to reflect minority interests acquired . . . . . . . . . . . . . (14)Adjustment upon increase in ownership interest from associated entity to controlled . . . . . . . . . . . . (2)Goodwill on acquisition . . . . . . . . . 11

33

Profit from acquisition date until 30 June 2006 . . . . . . . . . . . . . . . . . . 1


193



Fiscal 2005 acquisitions

During fiscal 2005, we completed the following significant acquisitions:

• 100% of the issued share capital of KAZ Group Limited and its controlled entities (KAZ Group); and

• 100% of the issued share capital of PSINet UK Limited and its controlled entities (PSINet Group).

We also acquired several other entities during fiscal 2005. These entities were not individually significant and have been aggregated as ‘Other’ in the below table.


KAZ Group (i) PSINet Group (ii) Other (iii) Total$m $m $m $m $m $m $m $m

Consideration for acquisitions

Cash consideration for acquisition . . . 333 108 124 565Deferred cash consideration. . . . . . . - 13 - 13Costs of acquisition . . . . . . . . . . . . 7 3 3 13Total purchase consideration . . . . . . 340 124 127 591

Cash balances acquired . . . . . . . . . (4) (6) (3) (13)Payments of deferred consideration for prior years’ acquisition . . . . . . . . . . - - 8 8Consideration deferred . . . . . . . . . . - (13) - (13)Outflow of cash on acquisition . . . . . 336 105 132 573

Fair valueCarrying

value Fair valueCarrying



valueAssets/(liabilities) at acquisition dateCash and cash equivalents . . . . . . . 4 4 6 6 2 2 12 12Trade and other receivables . . . . . . . 75 75 18 18 24 24 117 117Inventories . . . . . . . . . . . . . . . . . 6 6 - - 11 11 17 17Property, plant and equipment. . . . . 22 21 47 47 6 6 75 74Intangible assets. . . . . . . . . . . . . . 123 15 42 - 89 14 254 29Other assets. . . . . . . . . . . . . . . . . 3 3 5 5 5 5 13 13Deferred tax assets . . . . . . . . . . . . 13 13 1 1 7 7 21 21Trade and other payables . . . . . . . . (54) (54) (23) (23) (22) (22) (99) (99)Provisions . . . . . . . . . . . . . . . . . . (52) (52) - - (5) (5) (57) (57)Borrowings . . . . . . . . . . . . . . . . . (3) (3) (35) (35) (10) (10) (48) (48)Deferred tax liabilities . . . . . . . . . . (33) - (14) - (17) (1) (64) (1)Current tax liabilities . . . . . . . . . . . 3 3 - - (1) (1) 2 2Other liabilities. . . . . . . . . . . . . . . (5) (5) (18) (18) (13) (13) (36) (36)Net assets . . . . . . . . . . . . . . . . . . 102 26 29 1 76 17 207 44Adjustment upon increase in ownership interest from associated entity to controlled entity . . . . . . . . - - (1) (1)Goodwill on acquisition . . . . . . . . . 238 95 52 385

340 124 127 591Profit/(loss) from acquisition date until 30 June 2005 . . . . . . . . . . . . . . . . 11 8 (3) 16


194



(i) The KAZ Group is a provider of business process outsourcing, systems integration, consulting, applications development and information technology management services. It operates primarily in Australia, but also conducts business in the United States and Asia.

(ii) The PSINet Group is a provider of e-business infrastructure solutions and corporate internet protocol based communication services.

(iii) During fiscal 2005, we acquired the following entities:

• 100% of the issued share capital of ESA Holding Pty Ltd and its controlled entity Damovo (Australia) Pty Ltd, and of Damovo HK Limited (now known as Telstra Business Systems);

• 100% of the issued share capital of Universal Publishers Pty Ltd; • 100% of the issued share capital of Chief Entertainment Pty Ltd; • 100% of the issued share capital of Sytec Resources and its

controlled entities; and• additional 10% interest in the issued share capital of 1300 Australia

Pty Ltd giving us a 60% controlling interest.

These entities are not individually significant and have been aggregated as ‘Other’ per the previous table.

Other information relating to our acquisitions

We have recognised goodwill of $324 million (2005: $385 million) on acquisition of our controlled entities. The following factors contributed to the recognition of goodwill:

• forecast revenues and profitability of the acquired entities; • cost synergies expected by combining our current operations with

the acquired entities; and• strategic benefits to the operations of the Telstra Group.

We have identified and measured any significant intangible assets separately from goodwill on acquisition of our controlled entities.

If our acquisitions during fiscal 2006 had occurred on 1 July 2005, our adjusted consolidated income and consolidated profit for the year ended 30 June 2005 for the Telstra Group would have been $23,350 million and $3,174 million respectively.

If our acquisitions during fiscal 2005 had occurred on 1 July 2004, our adjusted consolidated income and consolidated profit for the year ended 30 June 2005 for the Telstra Group would have been $22,515 million and $4,303 million respectively.



195


Cash generating units

For the purposes of undertaking our impairment testing, we identify cash generating units (CGU’s). Our CGU’s are determined according to the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The carrying amount of our goodwill and intangible assets with an indefinite useful life are allocated across the following CGU’s:

(a) Our assessment of the Sensis CGU excludes the Trading Post Group, Universal Publishers and the Adstream Group that form part of the Sensis reportable segment.

In addition to the above CGU’s, we have two further significant CGU’s that are assessed for impairment. These two CGUs are:

• the Telstra Entity CGU, excluding the HFC network; and• the CGU comprising the HFC network.

The Telstra Entity CGU consists of our ubiquitous telecommunications infrastructure network in Australia, excluding the HFC network that we consider not to be integrated with the rest of our telecommunications network. Assets that form part of the ubiquitous telecommunications network are considered to be working together to generate our net cash flows. No one item of telecommunications equipment is of any value without the other assets to which it is connected in order to achieve delivery of our products and services.

25. Impairment

GoodwillIntangibles with indefinite

useful livesAs at 30 June As at 30 June

2006 2005 2006 2005CGU’s $m $m $m $m

Telstra CSL Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 970 1,228 - -New World Mobility Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 276 - - -Kaz Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270 274 - -TelstraClear Group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 137 152 - -United Kingdom Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 110 - -Sensis Group (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 36 - -Trading Post Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179 178 447 447Universal Publishers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 15 8 8Adstream Group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 - - -Telstra Business Systems. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 26 - -Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 18 8 7

2,073 2,037 463 462


196


Impairment testing

Our impairment testing compares the carrying value of an individual asset or CGU with its recoverable amount as determined using a value in use calculation.

Our assumptions for determining the recoverable amount of each CGU are based on past experience and our expectations for the future. Our cash flow projections are based on five year management approved forecasts. These forecasts use management estimates to determine income, expenses, capital expenditure and cash flows for each CGU.

We have used the following key assumptions in determining the recoverable amount of our CGUs to which goodwill or indefinite life

intangible assets has been allocated:

(a) Our assessment of the Sensis CGU excludes the Trading Post Group, Universal Publishers and the Adstream Group that form part of the Sensis reportable segment.

(b) Discount rate represents the pre tax discount rate applied to the cash flow projections. The discount rate reflects the market determined, risk adjusted, discount rate which was adjusted for specific risks relating to the CGU and the countries in which they operate.

(c) Terminal value growth rate represents the growth rate applied to extrapolate our cash flows beyond the five year forecast period. These growth rates are based on our expectation of the CGU’s long term performance in their respective markets.

25. Impairment (continued)

Discount rate (b)

Terminal value growth rate (c)

As at 30 June As at 30 June2006 2005 2006 2005

% % % %

Telstra CSL Group . . . . . . . . . 11.1 14.5 2.0 5.0New World Mobility Group . . . 12.5 - 2.0 -Kaz Group . . . . . . . . . . . . . . 16.6 16.7 3.0 3.0TelstraClear Group. . . . . . . . . 18.0 18.0 3.0 3.0United Kingdom Group . . . . . . 14.9 15.0 3.0 3.0Sensis Group (a) . . . . . . . . . . 13.7 13.7 3.0 3.0Trading Post Group . . . . . . . . 15.3 14.3 2.5 2.5Universal Publishers . . . . . . . 14.3 14.3 2.5 2.5Adstream Group . . . . . . . . . . 18.6 - 2.5 -Telstra Business Systems. . . . . 15.0 17.1 2.5 2.5


197


In addition, in fiscal 2006 the Telstra Group had total future commitments under cancellable operating leases of $356 million (2005: $343 million). In fiscal 2006, the Telstra Entity has total future commitments under cancellable operating leases of $354 million (2005: $338 million).

Description of our operating leases

We have operating leases for the following types of assets:• rental of land and buildings;• rental of motor vehicles, caravan huts and trailers, and mechanical

aids; and• rental of personal computers, laptops, printers and other related

equipment that are used in non communications plant activities.

The average lease term is:• 7 years for land and buildings;• 2 years for motor vehicles, 4 years for light commercial vehicles

and 7 to 12 years for trucks and mechanical aids; and• 3 years for personal computers and related equipment.

The majority of our operating leases relate to land and buildings.We have several subleases with total minimum lease payments of $59 million (2005: $75 million) for the Telstra Group and $43 million (2005: $54 million) for the Telstra Entity. Our property operating leases generally contain escalation clauses, which are fixed increases generally between 3% and 5%, or increases subject to the consumer price index. We do not have any significant purchase options.

Contingent rental payments exist for motor vehicles and are not significant compared with total rental payments made. These are based on unfair wear and tear, excess kilometres travelled, additional fittings and no financial loss to be suffered by the leasing company from changes to the original agreements. Our motor vehicles and related equipment must also remain in Australia.

A number of our operating leases are considered onerous due to our transformation project and as such, have been provided for in our financial statements. Refer to note 19 for details.

26.Expenditure commitments


2006 2005 2006 2005$m $m $m $m

(a) Capital expenditure commitmentsTotal capital expenditure commitments contracted for at balance date but notrecorded in the financial statements:Property plant and equipment commitmentsWithin 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 665 529 634 482Within 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62 15 60 15Within 2-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32 - 32 -Within 3-4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 - 9 -Within 4-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - 6 -After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 2 -

776 544 743 497

Commitments relating to our intangible assetsWithin 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 38 124 -Within 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130 26 105 -Within 2-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 - 16 -

305 64 245 -

(b) Operating lease commitmentsFuture lease payments for non-cancellable operating leases not recorded in thefinancial statements:Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 424 380 260 232Within 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 290 260 170 154Within 2-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201 209 108 117Within 3-4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139 149 60 64Within 4-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 128 47 49After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 397 152 154

1,530 1,523 797 770


198


Description of our finance leases

We have finance leases for the following types of assets:• property leases in our controlled entity, Telstra (PSINet) Limited;• computer mainframes, computer processing equipment and other

related equipment.

The average lease term is:• 24 years for the property leases with a remaining weighted

average life of 17 years; and• 5 years for computer mainframe and associated equipment.

Interest rates for our finance leases are:• property leases interest rate of 10.5%; and• computer mainframe, computer processing equipment and

associated equipment weighted average interest rate of 7.6%.

In addition to the above finance lease commitments, we previously entered into US finance leases for communications exchange equipment with various entities denominated in US dollars. We have prepaid all lease rentals due under the terms of these leases and have no additional payment obligations.

These entities lease the communications equipment from the ultimate lessor and then sublease the equipment to us. We have guaranteed that the lease payments will be paid by these entities to the ultimate lessor as scheduled over the lease terms (refer to note 27 for further information).

We hold an early buyout option that we could exercise in fiscal 2011 and fiscal 2013, otherwise the relevant lease period ends during fiscal 2015 and fiscal 2016. Refer to note 14 for further details on communication assets and equipment that are held under finance lease.

26. Expenditure commitments (continued)


2006 2005 2006 2005Note $m $m $m $m

(c) Finance lease commitmentsWithin 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 12 7 5Within 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 10 6 5Within 2-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 10 6 5Within 3-4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 8 3 5Within 4-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5 1 1After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52 54 - -Total minimum lease payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 99 23 21Future finance charges on finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . (45) (47) (3) (4)Present value of net future minimum lease payments . . . . . . . . . . . . . . . . . . . . 55 52 20 17

Recorded as current borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 7 5 5 4Recorded as non current borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 48 47 15 13Total finance lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 55 52 20 17


199


(i) Our jointly controlled entity, FOXTEL, has other commitments amounting to approximately $3,354 million (2005: $3,642 million). The majority of our 50% share of these commitments relate to minimum subscriber guarantees (MSG) for pay television programming agreements. These agreements are for periods of between 1 and 25 years and are based on current prices and costs under agreements entered into between the FOXTEL Partnership and various other parties. These minimum subscriber payments fluctuate in accordance with price escalation/reduction formulas contained in the agreements, as well as foreign currency movements. In addition to our MSG, FOXTEL has other commitments including obligations for satellite transponder costs and digital set top box units.

26. Expenditure commitments (continued)


2006 2005 2006 2005$m $m $m $m

(d) Other commitmentsOther expenditure commitments, other than commitments dealtwith in (a), (b) and (c) above, which have not been recorded inthe financial statements are:Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 481 600 317 411Within 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 236 301 118 127Within 2-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 213 79 64Within 3-4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215 160 46 40Within 4-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 111 16 18After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,162 1,195 5 6

2,381 2,580 581 666

Our other expenditure commitments include contracts for printing, engineeringand operational support services, information technology services andbuilding maintenance. In addition, other commitments also includecommitments relating to our investment in FOXTEL.

Commitments relating to our investment in FOXTEL (i):Within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 154 - -Within 1-2 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 154 - -Within 2-3 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 128 - -Within 3-4 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95 103 - -Within 4-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92 93 - -After 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,140 1,189 - -

1,677 1,821 - -


200


27. Contingent liabilities and contingent assets

We have no significant contingent assets as at 30 June 2006. The details and maximum amounts (where reasonable estimates can be made) are set out below for our contingent liabilities.

Telstra Entity

Common law claims

Certain common law claims by employees and third parties are yet to be resolved. As at 30 June 2006, management believes that the resolution of these contingencies will not have a significant effect on the Telstra Entity’s financial position, results of operations or cash flows. The maximum amount of these contingent liabilities cannot be reasonably estimated.

Included in our common law claims are the following litigation cases:

(a) In November 2002, Seven Network Limited and C7 Pty Limited (‘Seven’) commenced litigation against us and various other parties (‘the respondents’) in relation to the contracts and arrangements between us and some of those other parties relating to the right to broadcast Australian Football League and National Rugby League, the contract between FOXTEL and us for the provision of HFC cable services (the Broadband Co-operation Agreement) and other matters.

Seven seeks damages and other relief, including that some of these contracts and arrangements are void. Seven also seeks orders which would, in effect, require a significant restructure of the subscription television/sports rights markets in Australia. Expert reports filed by Seven were at one time used to suggest that Seven sought total damages of around $1.1 billion. However, some significant components of this expert evidence have since been ruled inadmissible by the trial judge and many of the facts on which Seven’s loss claim is based are contested. In addition to denying liability at all, the respondents have filed expert reports to the effect that, even if liability were found to exist, damages should be assessed at a very significantly lesser amount. If Seven obtained any order damages or for legal costs affecting Telstra, the liability arising from that order may subsequently be apportioned between the relevant respondents, with Telstra bearing only a portion of the total liability.

The matter is proceeding before the courts, with final oral submissions scheduled to commence in September 2006. In light of the progress of this case to date, Telstra considers that it is unlikely to have any material effect on our overall business or financial position.

(b) In January 2006, a shareholder commenced a representative proceeding in the Federal Court against Telstra. The statement of claim alleges that Telstra breached the Corporations Act and the Australian Stock Exchange (ASX) Listing Rules by failing to disclose:

• that Telstra’s senior management had formed an opinion that there had been past deficiencies in operating expenditure and capital expenditure on telecommunications infrastructure;

• that Telstra had forecast a long term decline in PSTN revenues; and• that Telstra had communicated these matters to the Government.

The claim seeks orders for compensation for the class of shareholders who bought shares between the time that these matters became known to Telstra and the time at which they were disclosed to the market. The proceeding is at an early stage and is unlikely to have any material effect on our overall business or financial position. Telstra will vigorously defend the claim.

(c) In December 2005, we increased our prices for line access provided to our competitors to prices closer to our average costs of providing that access. The ACCC appears to allege that these increases left insufficient margin for our competitors in respect of a “lower spend” segment of the retail market. The ACCC somehow considers that our conduct has or is likely to have the effect of substantially lessening competition across the retail market and therefore that we are in breach of the competition rule. On 12 April 2006, the ACCC issued a competition notice against us to this effect.

The ACCC has yet to commence enforcement proceedings against us but the maximum potential penalties which had accrued as at 30 June 2006 exceeded $200 million and are accruing at $3 million per day. Optus has issued proceedings in the Federal Court which, in part, rely on the competition notice and seek damages, a refund and an injunction preventing us from charging the increased prices and recovering our costs. Telstra will vigorously defend the Optus proceedings and any enforcement proceedings which may be brought by the ACCC.

Telstra has challenged the validity of the ACCC’s decision to issue the competition notice (and the preceding consultation notice) in the Federal Court on administrative law grounds. Amongst other things, we allege that the competition notice (and the preceding consultation notice) should be set aside for uncertainty and that the ACCC did not accord us procedural fairness by failing to properly consult with us prior to the issue of the competition notice. The ACCC argues that it does not owe us any duty of procedural fairness or natural justice when issuing competition notices.


201


Telstra Entity (continued)

Indemnities, performance guarantees and financial support

We have provided the following indemnities, performance guarantees and financial support through the Telstra Entity as follows:

• Indemnities to financial institutions to support bank guarantees to the value of $347 million (2005: $329 million) in respect of the performance of contracts.

• Indemnities to financial institutions in respect of the obligations of our controlled entities. The maximum amount of our contingent liabilities for this purpose was $311 million (2005: $282 million).

• Financial support for certain controlled entities to the amount necessary to enable those entities to meet their obligations as and when they fall due. The financial support is subject to conditions including individual monetary limits totalling $150 million (2005: $69 million) and a requirement that the entity remains our controlled entity.

• Guarantees of the performance of jointly controlled entities under contractual agreements to a maximum amount of $69 million (2005: $126 million).

• Guarantees over the performance of third parties under defeasance arrangements, whereby lease payments are made on our behalf by the third parties over the remaining terms of the finance leases. The lease payments over the remaining expected term of the leases amount to $843 million (US$626 million) (2005: $850 million (US$650 million)). We hold an early buyout option that we could exercise in fiscal 2011 and fiscal 2013, otherwise the relevant lease period ends during fiscal 2015 and fiscal 2016. Refer to note 26 for further details on the above finance leases.

• During fiscal 1998, we resolved to provide IBM Global Services Australia Limited (IBMGSA) with guarantees issued on a several basis up to $210 million as a shareholder of IBMGSA. We issued a guarantee of $68 million on behalf of IBMGSA during fiscal 2000. During fiscal 2004, we sold our shareholding in this entity. The $68 million guarantee is provided to support service contracts entered into by IBMGSA and third parties, and was made with IBMGSA bankers, or directly to IBMGSA customers. As at 30 June 2006, this guarantee has still been provided and $142 million (2005: $142 million) of the $210 million guarantee facility remains unused.

Upon sale of our shareholding in IBMGSA and under the deed of indemnity between shareholders, our liability under these performance guarantees has been indemnified for all guarantees that were in place at the time of sale. Therefore, the overall net exposure to any loss associated with a claim has effectively been offset.

Controlled entities

Indemnities provided by our controlled entities

In fiscal 2006 and fiscal 2005, our controlled entities had no significant outstanding indemnities in respect of obligations to financial institutions and corporations.

Other

FOXTEL minimum subscriber guarantees and other obligations

The Telstra Entity and its partners, News Corporation Limited and Publishing and Broadcasting Limited, and Telstra Media Pty Ltd and its partner, Sky Cable Pty Ltd, have entered into agreements relating to pay television programming with various parties and other miscellaneous contracts. Our commitments under these agreements relate mainly to minimum subscriber guarantees (MSG) (refer to note 26 for details of MSG commitments).

As we are subject to joint and several liability in relation to certain agreements entered into by the FOXTEL partnership, we would be contingently liable if our partners in this relationship failed to meet any of their obligations. As a result, our contingent liabilities arising from FOXTEL’s MSG and other agreements are $1,531 million (2005: $1,689 million).

FOXTEL Equity Contribution Deed (ECD)

FOXTEL previously entered into a $550 million bank facility arrangement to fund its full digital conversion and launch of new digital services. As part of this arrangement, we and FOXTEL’s other ultimate shareholders, News Corporation Limited and Publishing and Broadcasting Limited, entered into an ECD. Under the ECD, FOXTEL is required to call on a maximum of $200 million in equity contributions in certain specified circumstances as necessary to avoid default of a financial covenant. These equity contributions are based on ownership interests and, as a result, our maximum contingent liability is $100 million.

We have no joint or several liability relating to our partners’ contributions under the ECD. On 31 July 2006, FOXTEL entered into a $600 million syndicated secured term loan facility. As a result, the ECD has subsequently been terminated. Refer to note 34 for further details.

27. Contingent liabilities and contingent assets (continued)


202


Other (continued)

3GIS Partnership

During fiscal 2005, Telstra OnAir Holdings Pty Ltd and its partner, Hutchison 3G Australia Pty Ltd entered into agreements relating to the occupation of premises to provide 3GSM radio access network services.

As we are subject to joint and several liability in relation to agreements entered into by the 3GIS partnership, we would be contingently liable if our partners in this relationship failed to meet any of their obligations. As a result, our contingent liabilities arising from the above agreements are $154 million (2005: $132 million).

Reach working capital facility

We, together with our co-shareholder PCCW Limited (PCCW), previously bought a loan facility owed to a banking syndicate by Reach Finance Ltd, a subsidiary of our 50% owned joint ventureReach Ltd (Reach). As part of this arrangement, the shareholders also agreed to provide a US$50 million working capital facility to Reach. Under the facility Reach is entitled to request from Telstra a maximum of US$25 million to assist in meeting ongoing operational requirements. Drawdowns under this facility must be repaid at the end of each interest period as agreed between the parties and the loan must be fully repaid by 31 December 2007. The applicable interest rate is LIBOR plus 2.5%. As at 30 June 2006, Reach had not made any drawdown under this facility.

We have no joint or several liability relating to PCCW’s US$25 million share of the working capital facility.

ASIC deed of cross guarantee

A list of the companies that are part of our deed of cross guarantee appear in note 29. Each of these companies (except Telstra Finance Limited) guarantees the payment in full of the debts of the other named companies in the event of their winding up. Refer to note 29 for further information.

27. Contingent liabilities and contingent assets (continued)


203


The employee superannuation schemes that we participate in or sponsor exist to provide benefits for our employees and their dependants after finishing employment with us. It is our policy to contribute to the schemes at rates specified in the governing rules for defined contribution schemes, or at rates determined by the actuaries for defined benefit schemes.

The defined contribution divisions receive fixed contributions and our legal or constructive obligation is limited to these contributions.

The present value of our defined benefit obligations for our defined benefit plans are calculated by an actuary using the projected unit credit method. This method determines each year of service as giving rise to an additional unit of benefit entitlement and measures each unit separately to calculate the final obligation.

Details of our plans are set out below.

Telstra Superannuation Scheme (Telstra Super)

On 1 July 1990, Telstra Super was established and the majority of Telstra staff who were previously members of the Commonwealth Superannuation Scheme (CSS) transferred into Telstra Super. The Commonwealth has responsibility for past, present and future liabilities in respect of former and current Telstra employees who remain in the CSS. As a result, we have no current ongoing obligations for these CSS members, other than associated administration fees.

The Telstra Entity and some of our Australian controlled entities participate in Telstra Super. Telstra Super has both defined benefit and defined contribution divisions. The defined benefit divisions of Telstra Super are closed to new members.

Our defined benefit divisions provide benefits based on years of service and final average salary. Post employment benefits do not include payments for medical costs.

The funding policy adopted in respect of the defined benefit divisions is directed at ensuring that benefits accruing to members and beneficiaries are fully funded as the benefits fall due. The benefits received by members of each defined benefit division take into account factors such as the employee's length of service, final average salary, employer and employee contributions.

An actuarial investigation of this scheme is carried out at least every three years.

HK CSL Retirement Scheme

Our controlled entity, Hong Kong CSL Limited (HK CSL), participates in a superannuation scheme known as the HK CSL Retirement Scheme. This scheme was established under the Occupational Retirement Schemes Ordinance (ORSO) and is administered by an independent trustee. The scheme has three defined benefit sections and one defined contribution section.

The benefits received by members of the defined benefit schemes are based on the employees’ remuneration and length of service.

Actuarial investigations are undertaken annually for this scheme.

Other defined contribution schemes

A number of our subsidiaries also participate in defined contribution schemes which receive employer and employee contributions based on a percentage of the employees salaries. Telstra Group made contribution to these schemes of $32 million for fiscal 2006.

28. Post employment benefits


204


We use the following measurement dates for our defined benefit plans:

The fair value of the defined benefit plan assets and the present value of the defined benefit obligations as at the reporting date is determined by our actuary. The details of the defined benefit divisions are set out below:

(a) Net defined benefit plan asset

Our net defined benefit plan asset recognised in the balance sheet is determined as follows:

(i) At 30 June the fair value of defined benefit plan assets exceeds the present value of defined benefit obligations resulting in a net surplus. We recognise the net surplus as an asset as we have the ability to control this surplus to generate future funds that are available to us in the form of reductions in future contributions, or as a cash refund. The asset recognised does not exceed the present value of any economic benefits available in the form of refunds from the plan or reductions in future contributions to the plan.

28. Post employment benefits (continued)

Measurement date

Telstra Super . . . . . . . . . . . . . . . . . . . . . . . . . . 30 JuneHK CSL Retirement Scheme . . . . . . . . . . . . . . . . . 31 May


2006 2005 2006 2005$m $m $m $m

Fair value of defined benefit plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,553 4,518 4,459 4,439Present value of the defined benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . 3,675 4,308 3,605 4,234

Net defined benefit asset before adjustment for contributions tax. . . . . . . . . . . . . 878 210 853 205Adjustment for contributions tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 37 151 37Net defined benefit asset in the balance sheet at 30 June (i). . . . . . . . . . . . . . . . . 1,029 247 1,004 242

Experience adjustments:Aggregate actuarial gain included in defined benefit plan assets . . . . . . . . . . . . . 480 155 474 152Aggregate actuarial gain/(loss) included in the defined benefit obligation . . . . . . . . 340 (233) 329 (225)Net actuarial gain/(loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 820 (78) 803 (73)


205


(b) Amounts recognised in the income statement and in equity



2006 2005 2006 2005$m $m $m $m

The components of defined benefit plan expense recognised in the income statement are as follows:Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 214 220 210Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 205 202 202Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (322) (317) (316) (312)Member contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (40) (20) (39) (20)Curtailment gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) - (17) -Plan expenses after tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 16 15 16Notional transfer of funds for defined contribution benefits. . . . . . . . . . . . . . . . . 89 75 89 75Adjustment for contributions tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 30 28 30

185 203 182 201

The movements in our defined benefit plan asset recognised directly in equity in the statement of recognised income and expense are as follows:Actuarial (gains)/losses on our defined benefit plans . . . . . . . . . . . . . . . . . . . . . (820) 78 (803) 73Adjustment to contributions tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (142) 12 (142) 12

(962) 90 (945) 85


206


(c) Plan assets

Our weighted average asset allocation by major asset category as a percentage of the fair value of total plan assets as at 30 June are as follows:

Our defined benefit plan’s investment strategy is to control the level of risk by investing in a broad range of quality investments, and using a range of Australian and International investment managers who specialise in cash, fixed interest, shares and property. We constantly review our investments and adjust our investment strategy in order to maximise returns within this controlled risk profile and take advantage of perceived market inefficiencies.

Investment goals are to earn the best possible returns within the appropriate strategic level of risk, and maintain the financial viability of the funds by ensuring plan assets exceed benefit obligations.

Derivatives are used to limit exposure to market fluctuations and are used within appropriate control environments for direct and externally managed investments. Derivatives are not used for speculative purposes.


Telstra Super HK CSL Retirement SchemeAs at 30 June As at 30 June

2006 2005 2006 2005Target Actual Target Actual Target Actual Target Actual

% % % % % % % %Asset allocationsEquity instruments . . . . . . . . . . . . . . 68 69 67 62 60 61 60 64Debt instruments . . . . . . . . . . . . . . . 12 10 10 14 35 32 35 30Property . . . . . . . . . . . . . . . . . . . . . 15 16 18 13 - - - -Cash . . . . . . . . . . . . . . . . . . . . . . . 5 5 5 11 5 7 5 6

100 100 100 100 100 100 100 100


207


(d) Reconciliation of change in fair value of plan assets

Our actual return on defined benefit plan assets was 16.2% (2005: 12.5%) for Telstra Super and 12.5% (2005: 6.8%) for HK CSL Retirement Scheme.

(e) Reconciliation of change in present value of wholly funded defined benefit obligation

b(i) Benefits paid includes $640 million (2005: $116 million) of entitlements (to exiting defined benefit members) which have been retained in Telstra Super but transferred to the defined contribution scheme.

The following benefit payments, which reflect expected future service, are expected to be paid.



2006 2005 2006 2005$m $m $m $m

Fair value of defined benefit plan assets at beginning of year . . . . . . . . . . . . . . . 4,518 4,294 4,439 4,224Expected return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 322 317 316 312Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 3 - -Member contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 24 46 24Notional transfer of funds for defined contribution benefits. . . . . . . . . . . . . . . . . (89) (75) (89) (75)Benefits paid (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (715) (185) (712) (182)Actuarial gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480 155 474 152Plan expenses after tax. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15) (16) (15) (16)Foreign currency exchange rate changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1 - -Fair value of defined benefit plan assets at end of year. . . . . . . . . . . . . . . . . . . . 4,553 4,518 4,459 4,439


2006 2005 2006 2005$m $m $m $m

Present value of defined benefit obligation at beginning of year. . . . . . . . . . . . . . 4,308 3,837 4,234 3,775Current service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 227 214 220 210Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205 205 202 202Member contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 7 4Benefits paid (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (715) (185) (712) (182)Actuarial (gains)/losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (340) 233 (329) 225Curtailment gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17) - (17) -Present value of wholly funded defined benefit obligation at end of year . . . . . . . . 3,675 4,308 3,605 4,234


2007 2008 2009 2010 20112012 -

2016$m $m $m $m $m $m

Expected benefit payments . . . . . . . 197 204 215 237 257 1,712


208


(f) Principal actuarial assumptions

We used the following major assumptions to determine our defined benefit plan expense for the year ended 30 June:

We used the following major assumptions to determine our defined benefit obligations at 30 June:

(i) The present value of our defined benefit obligations is determined by discounting the estimated future cash outflows using a discount rate based on government guaranteed securities with similar due dates to these expected cash flows.

For Telstra Super we have used the 10-year Australian government bond rate as it has the closest term that one could get from the Australian bond market to match the term of the defined benefit obligations. We have not made any adjustment to reflect the difference between the term of the bonds and the estimated term of liabilities due to the observation that the current government bond yield curve is reasonably flat implying that the yields from government bonds with a term less than 10 years are expected to be very similar to the extrapolated bond yields with a term of 12 to 13 years.

Based on industry practice in Australia, we have adjusted the discount rate for Telstra Super to take into account future investment tax of the fund which is considered part of the ultimate cost to settle the obligation.

Similarly, for the HK CSL Retirement Scheme we have used the 10 year Hong Kong exchange fund yields as it has the closest term that one could get from the Hong Kong market to match the term of the defined benefit obligations.

The discount rate used in calculating the defined benefit obligation at 30 June 2006 was 5.1% p.a. after the adjustment to take into account future investment tax. Holding all other assumptions constant, the effect of a one percentage point decline in the discount rate assumption would be an increase in the 2007 defined benefit plan expense of approximately $69 million and an increase in the defined benefit obligation at 30 June 2006 of approximately $334 million.

(ii) The expected rate of return on assets has been based on historical and future expectations of returns for each of the major categories of asset classes over the subsequent 10 year period, or longer. Estimates are based on a combination of factors including the current market outlook for interest rates, inflation, earnings growth and currency strength. To determine the aggregate return, the expected future return of each asset class is weighted according to the strategic asset allocation of total plan assets.

Our assumption for the expected long-term rate of return on assets is 7% for 2007. As a sensitivity measure, holding all other assumptions constant, the effect of a one percentage point decline in the return on assets assumption would be an increase in our fiscal 2007 defined benefit plan expense of approximately $44 million.


Telstra Super HK CSL Retirement SchemeYear ended 30 June Year ended 30 June2006 2005 2006 2005

% % % %

Discount rate (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 5.1 3.7 3.8Expected rate of return on plan assets (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.5 7.5 6.8 6.8Expected rate of increase in future salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 4.0 2.5 2.5

Telstra Super HK CSL Retirement SchemeYear ended 30 June Year ended 30 June2006 2005 2006 2005

% % % %

Discount rate (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 4.7 5.0 3.8Expected rate of increase in future salaries (ii) . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 4.0 4.0 4.0


209


(g) Employer contributions

Telstra Super

In accordance with our funding deed with the trustee of Telstra Super, we are required to make future employer payments to Telstra Super in relation to the defined benefit plan as may be required. Our contributions to Telstra Super will recommence when the vested benefits index (VBI) - the ratio of defined benefit plan assets to defined benefit members’ vested benefits - falls to 103%. Our actuary is satisfied that contributions to maintain the VBI at this rate will maintain the financial position of Telstra Super at a satisfactory level. The VBI of the defined benefit divisions is 115% as at 30 June 2006(30 June 2005: 111%).

As at 30 June 2003, K O’Sullivan FIAA completed an actuarial investigation of Telstra Super. The next actuarial investigation of Telstra Super is due to be completed by 30 June 2007 based on the scheme’s financial position as at 30 June 2006.

The actuarial investigation of Telstra Super reported that a surplus continued to exist. In accordance with the recommendations within the actuarial investigation, we were not expected to, and did not make employer contributions to the Telstra Super defined benefit divisions for the financial year ended 30 June 2006 and 30 June 2005. The current contribution holiday includes the contributions otherwise payable to the accumulation divisions of Telstra Super. The continuance of the holiday is however dependent on the performance of the fund and we are monitoring the situation on a monthly basis in light of current market performance.

Telstra Entity’s contribution to the defined contribution divisions of Telstra Super were insignificant for fiscal 2006 and fiscal 2005. Based on the latest actuarial investigation, we do not expect to make any contributions to Telstra Super during fiscal 2007.

HK CSL Retirement Scheme

The contributions payable to the defined benefit divisions are determined by the actuary using the attained age normal funding actuarial valuation method.

Employer contributions made to the HK CSL Retirement Schemefor the financial year ended 30 June 2006 were $3 million (2005:$3 million). We expect to contribute $3 million (2005: $3 million) to our HK CSL Retirement Scheme in fiscal 2007.

Annual actuarial investigations are currently undertaken for this scheme by Watson Wyatt Hong Kong Limited.



210


(h) Net financial position of plan

The financial position of the defined benefit divisions of Telstra Super and the HK CSL Retirement Scheme is shown as follows:

(i) In accordance with AAS 25: “Financial Reporting by Superannuation Plans” the plan’s net surplus is determined as the difference between the present value of the accrued benefits and the net market value of plan assets.

(ii) Amounts for Telstra Super have been taken from the audited financial report of the scheme as at 30 June 2006 and 30 June 2005. The scheme assets are stated at net market values.

(iii) Amounts for the defined benefit divisions of the HK CSL Retirement Scheme have been taken from the actuarial valuation of the scheme as at 30 June 2006 and 30 June 2005. The scheme assets are stated at net market values.

The estimated period over which the benefits of our members will be returned is 11 years for Telstra Super (2005: 12 years) and 14.5 years for the HK CSL Retirement Scheme (2005: 14.7 years).

The net surplus under AAS 25 of $1,400 million (30 June 2005: $1,163 million) differs from the net defined benefit asset of $1,029 million(30 June 2005: $247 million) recognised in the balance sheet due to different measurement rules in the relevant accounting standards AAS 25 and AASB 119: “Employee Benefits”. Both standards require present value discounting of future benefits, however AAS 25 requires the use of a discount rate equal to an expected asset return whereas AASB 119 requires an after-tax bond yield.


Net scheme assets Accrued benefits Net surplus (i) Vested benefitsAs at 30 June As at 30 June As at 30 June As at 30 June

2006 2005 2006 2005 2006 2005 2006 2005$m $m $m $m $m $m $m $m

Telstra Super (ii) . . . . . . . . . . . . . . 4,459 4,439 3,079 3,281 1,380 1,158 3,853 3,995HK CSL Retirement Scheme (iii) . . . . . 94 79 74 74 20 5 68 63

4,553 4,518 3,153 3,355 1,400 1,163 3,921 4,058


211


29. Investments in controlled entities

The ultimate parent entity of the Telstra Group is the Commonwealth Government of Australia. Below is a list of our investments in controlled entities.

Name of entityCountry of

incorporationTelstra Entity’s recorded

amount of investment (#)% of equity held by immediate parent


$m $m % %Parent entityTelstra Corporation Limited (a) . . . . . . . . . . . . . . . . . . Australia - - - -Controlled entitiesTelecommunications Equipment Finance Pty Ltd * (d) . . . . Australia - - - -Telstra Finance Limited (a) . . . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0Telstra Corporate Services Pty Limited * (a) . . . . . . . . . . . Australia 7 7 100.0 100.0Transport Communications Australia Pty Ltd * . . . . . . . . . Australia 4 4 100.0 100.0Telstra ESOP Trustee Pty Limited * . . . . . . . . . . . . . . . . Australia - - 100.0 100.0Telstra Growthshare Pty Ltd * . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0Telstra Media Pty Limited * . . . . . . . . . . . . . . . . . . . . . Australia 393 380 100.0 100.0Telstra Multimedia Pty Limited (a) . . . . . . . . . . . . . . . . Australia 2,678 2,678 100.0 100.0Telstra International Limited (a) . . . . . . . . . . . . . . . . . . Australia 2 84 100.0 100.0Telstra New Wave Pty Ltd * (a) . . . . . . . . . . . . . . . . . . . Australia 1 1 100.0 100.0Hypertokens Pty Ltd * . . . . . . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0Hypermax Holdings Pty Ltd * . . . . . . . . . . . . . . . . . . . . Australia 8 8 100.0 100.0Chief Entertainment Pty Ltd * . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0Data & Text Mining Technologies Pty Ltd * . . . . . . . . . . . Lyrebird Technologies Pty Ltd * . . . . . . . . . . . . . . . . . .

Australia - - 100.0 100.0Australia - - 100.0 100.0

Telstra OnAir Infrastructure Holdings Pty Ltd * (d) . . . . . . . Australia - - - 100.0Telstra 3G Spectrum Holdings Pty Ltd * . . . . . . . . . . . . . . Australia 302 302 100.0 100.01300 Australia Pty Ltd * . . . . . . . . . . . . . . . . . . . . . . . Australia 5 5 60.0 60.0Telstra OnAir Holdings Pty Ltd * . . . . . . . . . . . . . . . . . . Australia 478 302 100.0 100.0Converged Networks Pty Ltd * (h) . . . . . . . . . . . . . . . . . Australia 1 - 100.0 -Telstra Payment Solutions Pty Limited (formerly Keycorp Solutions Limited) * (c) (h) . . . . . . . . . . . . . . . . . . . . . . Australia 56 - 100.0 -ESA Holding Pty Ltd * ( j) . . . . . . . . . . . . . . . . . . . . . . . Australia - 16 100.0 100.0Telstra Business Systems Pty Ltd * . . . . . . . . . . . . . . . . . Australia 69 - 100.0 100.0 Telstra Communications Limited (a) . . . . . . . . . . . . . . . Australia 29 29 100.0 100.0

• Telecom Australia (Saudi) Company Limited (d) (e) (f) (g) Saudi Arabia - - 50.0 50.0Telstra Rewards Pty Ltd * . . . . . . . . . . . . . . . . . . . . . . Australia 14 14 100.0 100.0

• Telstra Visa Card Trust (d) . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Qantas Telstra Card Trust (d) . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Telstra Visa Business Card Trust (d) . . . . . . . . . . . . . Australia - - 100.0 100.0

Telstra Media Holdings Pty Limited (a) . . . . . . . . . . . . . . Australia 30 30 100.0 100.0• Telstra Enterprise Services Pty Limited * (a) . . . . . . . . Australia - - 100.0 100.0• Telstra Pay TV Pty Ltd (a) . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0

Communications Network Holdings Pty Ltd * (h) . . . . . . . . Australia 4 - 100.0 -• Advanced Digital Communications (WA) Pty Ltd * (h) . . Australia - - 100.0 -• Western Communications Solutions Pty Ltd * (h) . . . . . Australia - - 100.0 -

Adstream (Aust) Pty Ltd (i) . . . . . . . . . . . . . . . . . . . . . Australia 23 - 58.0 -• Adstream Ltd (g) (i) . . . . . . . . . . . . . . . . . . . . . . . New Zealand - - 100.0 -• Quickcut (Aust) Pty Ltd (i) . . . . . . . . . . . . . . . . . . . Australia - - 100.0 -

(continued over page)


212


29. Investments in controlled entities (continued)





$m $m % %Controlled entities (continued) Telstra Holdings Pty Ltd (a) . . . . . . . . . . . . . . . . . . . . . Australia 7,176 7,176 100.0 100.0

• Beijing Australia Telecommunications Technical Consulting Services Company Limited (e) (g) . . . . . . . China - - 100.0 100.0

• Telstra Holdings (Bermuda) No. 2 Limited (g) . . . . . . . Bermuda - - 100.0 100.0• CSL New World Mobility Limited (formerly Telstra

CSL Limited) (c) (g) (h) . . . . . . . . . . . . . . . . . . . Bermuda - - 76.4 100.0• Bestclass Holdings Ltd (g) . . . . . . . . . . . . . . . British Virgin Islands - - 100.0 100.0

• Hong Kong CSL Limited (g) . . . . . . . . . . . . Hong Kong - - 100.0 100.0• Integrated Business Systems Limited (g) . . Hong Kong - - 100.0 100.0• One2Free Personalcom Limited (g) . . . . . Hong Kong - - 100.0 100.0• CSL Limited (g) . . . . . . . . . . . . . . . . . . Hong Kong - - 100.0 100.0

• New World PCS Holdings Limited (g) (h) . . . . . . Cayman Islands - - 100.0 -• New World 3G Limited (g) (h) . . . . . . . . . . . Hong Kong - - 100.0 -• New World PCS Limited (g) (h) . . . . . . . . . . Hong Kong - - 100.0 -

• New World Mobility Limited (g) (h) . . . . . Hong Kong - - 100.0 -• Telstra Holdings (Bermuda) No 1 Limited (g) . . . . . . . Bermuda - - 100.0 100.0• Telstra International HK Limited (g) . . . . . . . . . . . . . Hong Kong - - 100.0 100.0

• Damovo HK Ltd (g) . . . . . . . . . . . . . . . . . . . . . Hong Kong - - 100.0 100.0• Telstra Japan Retail K.K. (g) . . . . . . . . . . . . . . . . . . Japan - - 100.0 100.0• Telstra Singapore Pte Ltd (g) . . . . . . . . . . . . . . . . . Singapore - - 100.0 100.0• Telstra Global Limited (g) . . . . . . . . . . . . . . . . . . . United Kingdom - - 100.0 100.0

• PT Telstra Nusantara (g) . . . . . . . . . . . . . . . . . . Indonesia - - 100.0 100.0• Telstra Europe Limited (g) . . . . . . . . . . . . . . . . . United Kingdom - - 100.0 100.0

• Telstra (Cable Telecom) Limited (g) . . . . . . . . . United Kingdom - - 100.0 100.0• Telstra (PSINet) Limited (g) . . . . . . . . . . . . United Kingdom - - 100.0 100.0

• Telstra (CTE) Limited (g) . . . . . . . . . . . . . . . . United Kingdom - - 100.0 100.0• Cable Telecommunication Ltd (g) . . . . . . . . . . United Kingdom - - 100.0 100.0• PSINet Datacentre UK Ltd (g) . . . . . . . . . . . . . United Kingdom - - 100.0 100.0• Inteligen Communications Limited (g) . . . . . . . United Kingdom - - 100.0 100.0• Telstra Jersey Limited (g) . . . . . . . . . . . . . . . Jersey - - 100.0 100.0• PSINet Hosting Centre Ltd (g) . . . . . . . . . . . . . Jersey - - 100.0 100.0• Cordoba Holdings Ltd (g) . . . . . . . . . . . . . . . Jersey - - 100.0 100.0• London Hosting Centre Ltd (g) . . . . . . . . . . . . Jersey - - 100.0 100.0

• Telstra Inc. (g) . . . . . . . . . . . . . . . . . . . . . . . . . . United States - - 100.0 100.0• Telstra India (Private) Limited (g) . . . . . . . . . . . . . . India - - 100.0 100.0• Telstra Limited (g) . . . . . . . . . . . . . . . . . . . . . . . . New Zealand - - 100.0 100.0• Telstra New Zealand Holdings Limited (g) . . . . . . . . . New Zealand - - 100.0 100.0

• TelstraClear Limited (g) . . . . . . . . . . . . . . . . . . New Zealand - - 100.0 100.0• TelstraSaturn Holdings Limited (g) . . . . . . . . . New Zealand - - 100.0 100.0

(continued over page)


213







$m $m % %Controlled entities (continued)

• Sytec Resources Ltd (g) . . . . . . . . . . . . . . New Zealand - - 100.0 100.0• Sytec Resources (Australia) Pty Ltd * (g) . . Australia - - 100.0 100.0• DMZ Global Limited (g) . . . . . . . . . . . . New Zealand - - 100.0 100.0

• DMZ Global (Australia) Pty Ltd * (g) . . . Australia - - 100.0 100.0• CLEAR Communications Limited (g) . . . . . . . New Zealand - - 100.0 100.0

Network Design and Construction Limited (a) . . . . . . . . . Australia 20 177 100.0 100.0• NDC Global Holdings Pty Limited * (a) . . . . . . . . . . . Australia - - 100.0 100.0

• NDC Telecommunications India Private Limited (g) . India - - 98.0 98.0• PT NDC Indonesia (d) (g) . . . . . . . . . . . . . . . . . . Indonesia - - 95.0 95.0• NDC Global Philippines, Inc (d) (e) (g) . . . . . . . . . . Philippines - - 100.0 100.0• NDC Global Services (Thailand) Limited (d) (g) . . . . Thailand - - - 49.0• NDC Global Holdings (Thailand) Limited (d) (g) . . . . Thailand - - - 49.0

• NDC Global Services (Thailand) Limited (d) (g) . . Thailand - - - 51.0• NDC Global Services Pty Limited * (a) . . . . . . . . . . . . Australia - - 100.0 100.0

• NDC Telecommunications India Private Limited (g) . India - - 2.0 2.0Telstra Services Solutions Holdings Limited (a) . . . . . . . . . Australia 911 911 100.0 100.0

• Telstra CB.net Limited (a) . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Telstra CB.Com Limited (a) . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Telstra CB.fs Limited (a) . . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Telstra eBusiness Services Pty Limited (a) . . . . . . . . . Australia - - 100.0 100.0

• Australasian Insurance Systems Pty Ltd * (a) . . . . . Australia - - 100.0 100.0• TRC Computer Systems Pty Ltd * (a) . . . . . . . . . . . Australia - - 100.0 100.0• DBA Ltd * (a) . . . . . . . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0

• Brokerlink Pty Ltd * (a) . . . . . . . . . . . . . . . . . Australia - - 81.3 81.3• DBA Computer Systems Pty Ltd * (a) . . . . . . . . Australia - - 100.0 100.0

• Brokerlink Pty Ltd * (a) . . . . . . . . . . . . . . . Australia - - 18.7 18.7• Unilink Group Pty Ltd * (d) . . . . . . . . . . . . . Australia - - - 100.0

• KAZ Group Pty Limited (a) (i) . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• KAZ Computer Services (SEA) Pte Limited (d) (g) . . . Singapore - - 100.0 100.0• KAZ Computer Services (HK) Ltd (g) . . . . . . . . . . . Hong Kong - - 75.0 75.0• Enhanced Processing Technologies Inc (g) (i) . . . . . United States - - 100.0 -• Australian Administration Services Pty Ltd . . . . . . Australia - - 100.0 100.0

• AAS Superannuation Services Pty Limited . . . . . Australia - - 100.0 100.0• KAZ Business Services Australia Pty Ltd * . . . . . Australia - - 100.0 100.0

• KAZ Business Services Pty Ltd (a) . . . . . . . . . . . . Australia - - 100.0 100.0• KAZ Software Solutions Pty Ltd * (a) . . . . . . . . . . Australia - - 100.0 100.0• Atune Financial Solutions Pty Ltd * (a) . . . . . . . . . Australia - - 100.0 100.0• KAZ Technology Services Pty Ltd . . . . . . . . . . . . Australia - - 100.0 100.0

• IOCORE Asia Pacific Pty Ltd * . . . . . . . . . . . . . Australia - - 100.0 100.0• Techsouth Pty Ltd * . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• KAZ Technology Services Australia Pty Ltd * . . . Australia - - 100.0 100.0

• Fundi Software Pty Ltd * ( j) . . . . . . . . . . . . . . . . Australia - - - 100.0(continued over page)


214


# The amounts recorded are before any provision for reduction in value.

* These entities are Australian small proprietary limited companies, which are not required to prepare and lodge individual audited financial reports with the Australian Securities and Investment Commission.






$m $m % %Controlled entities (continued)Sensis Pty Ltd (a) (j) . . . . . . . . . . . . . . . . . . . . . . . . . . Australia 851 851 100.0 100.0

• Platefood Limited (h) (g) . . . . . . . . . . . . . . . . . . . . United Kingdom - - 61.0 -• Just Listed Pty Limited * (a) ( j) . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• CitySearch Australia Pty Ltd * . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0

• CitySearch Canberra Pty Ltd * . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Trading Post Group Pty Limited (a) ( j) . . . . . . . . . . . . Australia - - - 33.0• Trading Post (Australia) Holdings Pty Ltd (a) ( j) . . . . . . Australia - - 100.0 100.0

• Trading Post Group Pty Limited (a) ( j) . . . . . . . . . . Australia - - 100.0 67.0• The Melbourne Trading Post Pty Ltd (a). . . . . . . Australia - - 100.0 100.0

• The National Trading Post Pty Ltd * (a) . . . . . Australia - - 100.0 100.0• Australian Retirement Publications

Pty Limited * (a) . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Collectormania Australia Pty Ltd * (a) . . . . . . . . Australia - - 100.0 100.0• The Personal Trading Post Pty Limited (a) . . . . . Australia - - 100.0 100.0• Auto Trader Australia Pty Ltd (a) . . . . . . . . . . . Australia - - 100.0 100.0

• WA Auto Trader Pty Ltd (a) . . . . . . . . . . . . . Australia - - 100.0 100.0• Sydney Buy & Sell Pty Ltd * . . . . . . . . . . . . Australia - - 100.0 100.0• Sydney Auto Trader Pty Ltd * . . . . . . . . . . . Australia - - 100.0 100.0

• Ad Mag SA & NSW Pty Ltd * . . . . . . . . . . . . . . Australia - - 100.0 100.0• Ad Mag AGI Pty Ltd * . . . . . . . . . . . . . . . . Australia - - 100.0 100.0

• Trading Post (AW) Pty Limited * . . . . . . . . . . . . Australia - - 100.0 100.0• Warranty Direct (Australia) Pty Ltd *. . . . . . . Australia - - 100.0 100.0

• Trading Post (TCA) Pty Ltd (a) . . . . . . . . . . . . . Australia - - 100.0 100.0• Research Resources Pty Ltd * . . . . . . . . . . . Australia - - 100.0 100.0

• Queensland Trading Post Pty Ltd * . . . . . . Australia - - 100.0 100.0• Trading Post Marketing (Qld) Pty Ltd * . Australia - - 100.0 100.0• Trading Post on the Net Pty Ltd * . . . . Australia - - 100.0 100.0

• Trading Post Australia Pty Limited (a) . . . . . . Australia - - 100.0 100.0• Appraised Staff Agency Pty Ltd * . . . . . . . . . Australia - - 100.0 100.0• Tradernet Pty Ltd * . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Trading Post Classifieds Pty Limited * . . . . . . Australia - - 100.0 100.0• Trading Post On Line Pty Limited * . . . . . . . . Australia - - 100.0 100.0

• Sensis Holdings Pty Ltd * (i) . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Invizage Pty Ltd * (i) . . . . . . . . . . . . . . . . . . . . . Australia - - 100.0 75.0

• PC S.O.S. Pty Ltd * . . . . . . . . . . . . . . . . . . . . Australia - - 100.0 100.0• Universal Publishers Pty Limited (a) . . . . . . . . . . . . . Australia - - 100.0 100.0• Sensis (Victoria) Pty Ltd * (h) . . . . . . . . . . . . . . . . . Australia - - 100.0 -

Total investment in consolidated entities . . . . . . . . . . . . 13,062 12,975


215


(a) ASIC deed of cross guarantee

On 31 May 2006 and 28 June 2006, the Telstra Entity and certain of its controlled entities entered into two revocation deeds, the combined effect of which is to revoke the deed of cross guarantee dated 4 June 1996 (1996 Deed) in its entirety. In accordance with the terms of the 1996 Deed, revocation of the deed does not take effect until the date which is 6 months after lodgement of the relevant revocation deed with the Australian Securities and Investment Commission (ASIC).

A new deed of cross guarantee was entered into on 28 June 2006 (New Deed), pursuant to an ASIC Order dated 22 June 2006 (ASIC Order). The New Deed was entered into between the parties to the revocation deed dated 28 June 2006 and a number of additional controlled entities of the Telstra Entity. The New Deed took effect immediately upon lodgement with ASIC on 30 June 2006.

The following companies have entered into the 1996 Deed and/or the New Deed:

• Telstra Corporation Limited (i) (ii);• Telstra Corporate Services Pty Limited (i) (ii);• Telstra Multimedia Pty Limited (i) (ii);• Telstra International Limited (i) (ii); • Telstra Communications Limited (i) (ii);• Telstra Media Holdings Pty Limited (i);• Telstra Enterprise Services Pty Limited (i);• Telstra Pay TV Pty Ltd (i); • Telstra Holdings Pty Ltd (i) (ii); • Network Design and Construction Limited (i) (ii);• NDC Global Holdings Pty Limited (i) (ii);• NDC Global Services Pty Limited (i) (ii);• Telstra Services Solutions Holdings Limited (i) (ii);• Telstra eBusiness Services Pty Limited (i) (ii);• Australasian Insurance Systems Pty Ltd (i);• TRC Computer Systems Pty Ltd (i);• DBA Ltd (i);• Brokerlink Pty Ltd (i);• DBA Computer Systems Pty Ltd (i);• KAZ Group Limited (ii);• KAZ Business Services Pty Ltd (ii);• KAZ Software Solutions Pty Ltd (ii);• Atune Financial Services Pty Ltd (ii);• Sensis Pty Ltd (i) (ii);• Trading Post (Australia) Holdings Pty Ltd (i) (ii);• Trading Post Group Pty Limited (i) (ii);• The Melbourne Trading Post Pty Ltd (i) (ii);• The National Trading Post Pty Ltd (i) (ii);• Collectormania Australia Pty Ltd (i) (ii);• Australian Retirement Publications Pty Limited (i);• The Personal Trading Post Pty Limited (i) (ii);• Auto Trader Australia Pty Ltd (i) (ii); • WA Auto Trader Pty Ltd (i) (ii);

• Just Listed Pty Limited (i) (ii);• Trading Post (TCA) Pty Ltd (i) (ii);• Trading Post Australia Pty Limited (i) (ii); and• Universal Publishers Pty Limited (ii).

(i) Companies which form the 1996 Deed

(ii) Companies which form the New Deed

Telstra Finance Limited is trustee under both the 1996 Deed and the New Deed, however is not a group entity under either deed.

In respect of both the 1996 Deed and the New Deed, the relevant group entities under the deed:

• form a closed group and extended closed group as defined in the ASIC Class Order 98/1418 (Class Order) and the ASIC Order;

• do not have to prepare and lodge audited financial reports under the Corporations Act 2001. This does not apply to Telstra Corporation Limited; and

• guarantee the payment in full of the debts of the other parties to the deed in the event of their winding up.

The following companies ceased to be party to the 1996 Deed due to a revocation deed as at 11 September 2005:

• Telstra New Wave Pty Ltd;• Telstra CB.net Limited;• Telstra CB.Com Limited; and• Telstra CB.fs Limited.

(b) ASIC deed of cross guarantee financial information

The consolidated assets and liabilities of the closed group and extended closed group is presented according to both the Class Order and the ASIC Order as follows. This excludes Telstra Finance Limited. All significant transactions between members of the closed group have been eliminated.



216


(b) ASIC deed of cross guarantee financial information (continued)


Closed group balance sheet New Deed 1996 DeedAs at 30

JuneAs at 30 June

2006 2006 2005$m $m $m

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 479 501 1,421Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,377 3,533 3,553Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 175 191Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 22 4Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190 202 217Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,250 4,433 5,386Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 876 870 884Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 19 15Investments - accounted for using the equity method . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 21 46Investments - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,348 3,421 3,244Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,792 21,785 21,190Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,491 3,389 3,655Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 392 392 -Defined benefit assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,004 1,004 241Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,944 30,901 29,275Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,194 35,334 34,661

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,991 2,973 2,041Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,531 2,323 2,159Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400 400 518Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 708 697 378Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 13 11Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,089 1,089 1,090Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,732 7,495 6,197Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65 65 62Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,376 11,376 10,907Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,582 1,589 1,664Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 951 945 855Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 768 768 864Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 400 387Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,143 15,143 14,739Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,875 22,638 20,936Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,319 12,696 13,725

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,569 5,569 5,536Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 18 12Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,732 7,109 8,177Equity available to the closed group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,319 12,696 13,725


217


(b) ASIC deed of cross guarantee financial information (continued)

The consolidated profit for the year of the closed group and extended closed group is presented according to both the Class Order and the ASIC Order as follows. This excludes Telstra Finance Limited. All significant transactions between members of the closed group have been eliminated.


Closed group income statement and retained profits reconciliation New Deed 1996 DeedYear ended

30 JuneYear ended 30 June

2006 2006 2005Note $m $m $m

IncomeRevenue (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,323 20,594 20,173Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 304 318 254

20,627 20,912 20,427ExpensesLabour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,843 3,796 3,387Goods and services purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,372 3,652 3,266Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,317 4,349 3,648

11,532 11,797 10,301

Share of net (gain)/loss from jointly controlled and associated entities. . . . . . . . . . . . . . . . . . (10) (12) (13)11,522 11,785 10,288

Earnings before interest, income tax expense, depreciation and amortisation (EBITDA) . . . . . . . 9,105 9,127 10,139Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,721 3,717 3,228Earnings before interest and income tax expense (EBIT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,384 5,410 6,911

Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 120 156Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 978 975 936Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 858 855 780

Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,526 4,555 6,131

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,380 1,378 1,766

Profit for the year available to the closed group . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,146 3,177 4,365

Retained profits at the beginning of the financial year available to the closed group . . . . . . . . . 7,894 8,177 8,467Actuarial gain/(loss) on our defined benefit plans (net of tax effect) . . . . . . . . . . . . . . . . . . . . 661 661 (61)Share buy-back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21 - - (476)Transfer out of closed group. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 64 -Transfers to retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 6Total available for distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,701 12,079 12,301Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,969 4,970 4,124Retained profits at the end of the financial year available to the closed group . . . . . . . . . . . . . 6,732 7,109 8,177


218


(c) Change of company names

• Keycorp Solutions Limited changed its name to Telstra Payment Solutions Limited on 2 September 2005.

Furthermore, the status of this controlled entity changed from a public to a private company on 18 May 2006 to be named Telstra Payment Solutions Pty Limited.

• On 31 March 2006, Telstra CSL Limited changed its name to CSL New World Mobility Limited.

(d) Liquidations

As at 30 June 2006, the following controlled entities were in voluntary liquidation:

• Telecom Australia (Saudi) Company Limited;• NDC Global Philippines, Inc;• PT NDC Indonesia;• Qantas Telstra Card Trust;• Telstra Visa Business Card Trust;• Telstra Visa Card Trust; and• KAZ Computer Services (SEA) Pte Limited.

The following companies were liquidated or deregistered during fiscal 2006:

• NDC Global Services (Thailand) Limited;• NDC Global Holdings (Thailand) Limited;• Telecommunications Equipment Finance Pty Ltd;• Telstra OnAir Infrastructure Holdings Pty Ltd; and• Unilink Group Pty Ltd.

(e) Controlled entities with different balance dates

The following companies have balance dates that differ from our balance date of 30 June for fiscal 2006:

• Telecom Australia (Saudi) Company Limited - 31 December; • Beijing Australia Telecommunications Technical Consulting

Services Company Limited - 31 December; and• NDC Global Philippines, Inc - 31 December.

Financial reports prepared as at 30 June are used for consolidation purposes.

(f) Controlled entities in which our equity ownership is less than or equal to 50%

We own 50% of the issued capital of Telecom Australia (Saudi) Company Limited. We can exercise control over the Board of Directors of this entity in perpetuity, and therefore we have consolidated the financial results, position and cash flows of this entity into our group financial report.

(g) Controlled entities not individually audited by the Australian National Audit Office

Companies not audited by the Australian National Audit Office, our Australian statutory auditor.



219


(h) New incorporations and investments

• On 11 August 2005, we established a new entity named Platefood Limited to facilitate a new investment for nominal consideration.

• On 25 August 2005, we established a new entity named Sensis (Victoria) Pty Ltd to facilitate a new investment for nominal consideration.

• On 1 July 2005, we acquired 100% of the issued capital of Keycorp Solutions Limited for a total consideration of $56 million including acquisition costs. Subsequent to acquisition, the entity was renamed to Telstra Payment Solutions Pty Limited.

• On 31 March 2006, we acquired 100% of the issued capital of the Converged Networks Group for a total consideration of $5 million including acquisition costs. Converged Networks Group included the following controlled entities:

• Converged Networks Pty Ltd;• Communications Network Holdings Pty Ltd;

• Advanced Digital Communications (WA) Pty Ltd; and• Western Communications Solutions Pty Ltd.

Converged Networks Group is a provider of voice and data networks which operates primarily in Western Australia.

• On 31 March 2006, we merged our 100% owned Hong Kong mobile operations (Telstra CSL Group) with the Hong Kong mobile operations of New World PCS Holdings Limited and its controlled entities (New World Mobility Group) to form the CSL New World Mobility Group.

Under the merger agreement, Telstra CSL Limited issued new shares to New World Mobility Holdings Limited in return for 100% of the issued capital of the New World Mobility Group and $42 million in net proceeds (net of acquisition costs). The fair value of the Telstra CSL Limited shares issued amounted to $577 million and diluted our ownership in the merged group to 76.4%. Our merger with the New World Mobility Group included the acquisition of the following controlled entities:

• New World PCS Holdings Limited;• New World 3G Limited;• New World PCS Limited; and

• New World Mobility Limited.

The CSL New World Mobility Group is a provider of mobile telecommunication products and services which operates primarily in Hong Kong.

(i) Other acquisitions

• On 1 July 2005, our controlled entity Sensis Holdings Pty Ltd acquired a further 25% of the issued share capital of Invizage Pty Ltd for a total cash consideration of $5 million including acquisition costs.

Invizage Pty Ltd is a provider of information technology services for small and medium Australian organisations.

• On 22 December 2005, our controlled entity Kaz Group Pty Limited acquired a further 40% of the issued share capital of Enhanced Processing Technologies Inc for nominal consideration, giving us ownership of the entity. Prior to this date, Enhanced Processing Technologies was classified as a jointly controlled entity.

Enhanced Processing Technologies Inc is a provider of cheque processing technology and services which operates primarily in the United States.

• On 1 February 2006, we acquired a further 24.7% of the issued capital of Adstream (Aust) Pty Ltd and its controlled entities (Adstream Group) for a total consideration of $21 million including acquisition costs, giving us a controlling interest of 58%. Prior to this date, Adstream (Aust) Pty Ltd was classified as a jointly controlled entity. Our acquisition of the Adstream Group included the following controlled entities:

• Adstream Ltd; and• Quickcut (Aust) Pty Ltd.

The Adstream Group is a provider of on-line services to advertisers that streamlines client approval and distribution of electronic advertising to media outlets.

(j) Sales and disposals

• On 31 August 2005, Trading Post Group Pty Limited (TPG) sold its investment in Just Listed Pty Ltd to Sensis Pty Ltd (Sensis).

In addition, Sensis sold its 33% interest in TPG to Trading Post (Australia) Holdings Pty Ltd on 31 August 2005.

These controlled entities are all within the Telstra Group.

• On 1 May 2006, our controlled entity KAZ Group Pty Limited divested its interest in Fundi Software Pty Ltd in a management buy-out for a total consideration of $4 million.

• On 26 June 2006, ESA Holding Pty Ltd sold its investment in Telstra Business Systems Pty Ltd to the Telstra Entity.



220


Our investments in jointly controlled and associated entities are listed below:

Unless noted at (e), all investments have a balance date of 30 June and are incorporated in Australia. Our voting power is the same as our ownership interest unless otherwise noted.

(i) This includes both the FOXTEL Partnership and the FOXTEL Television Partnership.

(*) The Telstra Group carrying amounts are calculated using the equity method of accounting. The Telstra Entity’s carrying amounts are at cost less any accumulated impairment loss.

30. Investments in jointly controlled and associated entities

Principal Ownership Telstra Group’s carrying Telstra Entity’s carryingName of Entity activities interest amount of investment (*) amount of investment (*)

As at 30 June As at 30 June As at 30 June2006 2005 2006 2005 2006 2005

% % $m $m $m $mJointly controlled entitiesFOXTEL Partnerships (h) (i) Pay television 50.0 50.0 - - - -Customer Services Pty Limited (h) Customer service 50.0 50.0 - - - -FOXTEL Management Pty Limited Management services 50.0 50.0 - - - -FOXTEL Cable Television Pty Ltd (a) (h) Pay television 80.0 80.0 - - - -Reach Ltd (incorporated in Bermuda) (e) (h)

International connectivity services 50.0 50.0 - - - -

Xantic B.V. (incorporated in The Netherlands) (b)

Global satellite communications - 35.0 - 32 - 30

TNAS Limited (incorporated in New Zealand) (e) (h)

Toll free number portability in New Zealand 33.3 33.3 - - - -

Money Solutions Pty Ltd (h) Financial advice and education services 50.0 50.0 - - - -

HelpYouPay Systems Pty Ltd (b) Debt management services - 50.0 - - - -HelpYouPay Pty Ltd (b) Debt management services - 50.0 - - - -

Enhanced Processing Technologies Pty Ltd (a)Business process outsourcing 60.0 60.0 1 - - -

Enhanced Processing Technologies Inc (incorporated in United States) (c) Software sales - 60.0 - - - -

Adstream (Aust) Pty Ltd (c)Digital advertising and asset management - 33.3 - 3 - 3

3GIS Pty Ltd (e) Management services 50.0 50.0 - - - -3GIS Partnership (e) 3G network services 50.0 50.0 - - - -Bridge Mobile Pte Ltd (incorporated in Singapore) Regional roaming provider 12.5 12.5 1 1 - -

m.Net Corporation Limited (d)Mobile phone content provider 26.4 39.5 - - - -

2 36 - 33

Associated entitiesAustralia-Japan Cable Holdings Limited (incorporated in Bermuda) (d) (e) (h) Network cable provider 46.9 39.9 - - - -Telstra Super Pty Ltd (a) (h) Superannuation trustee 100.0 100.0 - - - -

Keycorp Limited (d)Electronic transactions solutions 47.6 47.8 18 8 18 8

Telstra Foundation Ltd (a)Charitable trustee organisation 100.0 100.0 - - - -

LinkMe Pty LtdInternet recruitment provider 40.0 40.0 3 4 - -

21 12 18 8


221


(a) Associated entities and jointly controlled entities in which we own more than 50% equity

• We own 80% of the equity of FOXTEL Cable Television Pty Ltd.This entity is disclosed as a jointly controlled entity as the outside equity shareholders have participating rights that prevent us from dominating the decision making of the Board of Directors. Effective voting power is restricted to 50% and we have joint control.

• We own 100% of the equity of Telstra Super Pty Ltd, the trustee for the Telstra Superannuation Scheme (Telstra Super). We do not consolidate Telstra Super Pty Ltd as we do not control the Board of Directors. We have equal representation with employee representatives on the Board. Our voting power is limited to 44%, which is equivalent to our representation on the Board. The entity is therefore classified as an associated entity as we have significant influence over it.

• We own 100% of the equity of Telstra Foundation Ltd (TFL). TFL is limited by guarantee (guaranteed to $100) with Telstra Corporation Limited being the sole member. We did not contribute any equity to TFL on incorporation. TFL is the trustee of the Telstra Community Development Fund and manager of the Telstra Kids Fund. We do not consolidate TFL as we do not control the Board. However, due to our Board representation we significantly influence this entity. Our voting power is limited to 43%, which is equivalent to our representation on the Board.

• We own 60% of the equity of Enhanced Processing Technologies Pty Ltd. This entity is subject to joint control based on the shareholders’ agreement, under which mutual consent of the shareholders is required in determining the financial and operating policies of the entity. As a result, it has been classified as a jointly controlled entity.

(b) Sale of investments

• On 30 July 2005, we completed the sale of our 50% shareholding in HelpYouPay Pty Ltd. The revenue on sale of the investment was not considered significant.

• On 30 July 2005, we completed the sale of our 50% shareholding in HelpYouPay Systems Pty Ltd. The revenue on sale of the investment was not considered significant.

• On 16 February 2006, we completed the sale of our 35% shareholding in Xantic B.V. for $89 million (US$67 million). During fiscal 2006, we received $18 million (US$13 million) as a result of a capital return by Xantic B.V.

(c) Investments no longer equity accounted

• On 22 December 2005, we acquired the remaining 40% shareholding in Enhanced Processing Technologies Inc giving us ownership of the entity. Prior to this date Enhanced Processing Technologies Inc was a jointly controlled entity and was equity accounted. Refer to note 29 for further details.

• On 1 February 2006, we acquired an additional 24.7% shareholding in Adstream (Aust) Pty Ltd giving us a controlling interest. Prior to this date Adstream (Aust) Pty Ltd was a jointly controlled entity and was equity accounted. Refer to note 29 for further details.

(d) Other changes in jointly controlled and associated entities

• On 1 July 2005, we acquired an intangible asset from our associated entity Keycorp Limited (Keycorp) for $55 million. We reduced the value of the intangible asset recognised and increased our investment in Keycorp to the extent to which this transaction is unrealised outside the Telstra Group. This resulted in a $26 million increase in the carrying value of our investment. Under the terms of the transaction Keycorp also returned capital to its shareholders, our share amounting to $16 million. Refer to (g) for details on our movements in the consolidated equity amount of our associated entities.

In addition, our investment in Keycorp decreased from 47.8% to 47.6% on 29 August 2005. The decrease was due to a dilution in our shareholding.

• On 10 August 2005, our investment in m.Net Corporation Limited decreased from 39.5% to 26.4%. The decrease was due to a dilution in our shareholding.

• On 16 November 2005, our investment in Australia-Japan Cable Holdings Limited increased from 39.9% to 46.9%. The increase was due to another investor forfeiting their interest in the investment.

30. Investments in jointly controlled and associated entities (continued)


222


(e) Jointly controlled and associated entities with different balance dates

The following jointly controlled and associated entities have different balance dates to our balance date of 30 June for fiscal 2006:

• Reach Ltd - 31 December; • TNAS Limited - 31 March;• 3GIS Pty Ltd - 31 December;• 3GIS Partnership - 31 December; and• Australia-Japan Cable Holdings Limited - 31 December.

Financial reports prepared as at 30 June are used for equity accounting purposes. Our ownership interest in jointly controlled and associated entities with different balance dates is the same at that balance date as 30 June unless otherwise noted.

(f) Share of jointly controlled and associated entities’ net (profits)/losses

(i) In fiscal 2005, previously unrecognised equity accounted losses in Reach Ltd (Reach) were recognised due to our commitment to fund 50% of Reach’s committed capital expenditure, which was accounted for as an investment in Reach. Refer to note 36 for further details.



2006 2005$m $m

Net (profit)/loss from jointly controlled and associated entities has been contributed by the following entities:Jointly controlled entities- FOXTEL Partnerships . . . . . . . . . . . . . . 5 5- Stellar Call Centres Pty Ltd. . . . . . . . . . . - (3)- Xantic B.V. . . . . . . . . . . . . . . . . . . . . (12) (5)

(7) (3)Associated entities- Keycorp Limited . . . . . . . . . . . . . . . . . 1 (5)- LinkMe Pty Ltd . . . . . . . . . . . . . . . . . . 1 -

2 (5)(5) (8)

Net (profit)/loss from jointly controlled entities has been adjusted by the following:Jointly controlled entities- Reach Ltd (i) . . . . . . . . . . . . . . . . . . . . - 102

(5) 94


223


(g) Other disclosures for jointly controlled and associated entities

The movements in the consolidated equity accounted amount of our jointly controlled and associated entities are summarised as follows:

(i) The commitments and guarantees of our jointly controlled entities for which we are directly liable are included within note 26 and note 27 respectively.


Jointly controlledentities Associated entities

Telstra Group Telstra GroupYear ended/As at Year ended/As at

30 June 30 June2006 2005 2006 2005

Note $m $m $m $m

Carrying amount of investments at beginning of year . . . . . . . . . . . . . . . . . . . . 36 40 12 -Additional investments made during the year . . . . . . . . . . . . . . . . . . . . . . . . . 5 14 - 3

41 54 12 3Share of profits/(losses) before income tax expense . . . . . . . . . . . . . . . . . . . . . . 6 2 (3) 12Share of income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1) 1 (7)Share of profits/(losses) for the year after income tax expense . . . . . . . . . . . . . . . 6 1 (2) 5Amortisation of unrealised inter-entity profits after income tax . . . . . . . . . . . . . . 1 2 - -Share of profits/(losses) for the year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 3 (2) 5Dividends and distributions received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (1) - (1)Share of reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 5Share of foreign currency translation reserve and movements due to exchange rate translations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 (2) - -Sale, transfers and reductions of investments during the year . . . . . . . . . . . . . . . (47) (16) (15) -Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 26 -Carrying amount of investments before reduction to recoverable amount . . . . . . . . 2 38 21 12Impairment losses recognised in the income statement during the year . . . . . . . . . - (2) - -Carrying amount of investments at end of year . . . . . . . . . . . . . . . . . . . . . . .13 2 36 21 12

Our share of contingent liabilities of jointly controlled and associatedentities - we are not directly liable for these . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 6 -

Our share of capital commitments contracted for by our jointly controlledand associated entities - we are not directly liable for these (i) . . . . . . . . . . . . . . . 11 9 - -

Our share of other expenditure commitments contracted for by our jointlycontrolled and associated entities (other than the supply of inventories) - we are not directly liable for these (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 52 2 4


224


(g) Other disclosures for jointly controlled and associated entities (continued)

Summarised presentation of all of our jointly controlled and associated entities’ assets, liabilities, revenue and expense items (including jointly controlled and associated entities where equity accounting has been suspended):


Jointly controlledentities Associated entities

Telstra Group Telstra GroupYear ended/As at Year ended/As at

30 June 30 June2006 2005 2006 2005

$m $m $m $m

Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 556 695 73 131Non current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 811 909 346 354Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,367 1,604 419 485

Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 950 1,521 58 88Non current liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 927 579 536 502Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,877 2,100 594 590Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (510) (496) (175) (105)

Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,152 2,335 150 174Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,067 2,140 180 211Profit/(loss) before income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 195 (30) (37)Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 8 4 6Profit/(loss) for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82 187 (34) (43)

Summarised presentation of our share of all our jointly controlled and associated entities revenue and expense items (including jointly controlled entities where equity accounting has been suspended):

Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,369 1,377 71 81Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,326 1,280 85 96Profit/(loss) before income tax expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 97 (14) (15)Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 5 2 3Profit/(loss) for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 92 (16) (18)


225


(h) Suspension of equity accounting

Our unrecognised share of (profits)/losses for the period and cumulatively, for our entities where equity accounting has ceased and the investment is recorded at zero due to losses made by these entities and/or reductions in the equity accounted carrying amount, is shown below:

Equity accounting has also been suspended for the following jointly controlled and associated entities:

• Customer Services Pty Limited;• FOXTEL Cable Television Pty Ltd;• TNAS Limited;• Money Solutions Pty Ltd; and• Telstra Super Pty Ltd.

There are no significant unrecognised profits/losses in these entities.



Period Cumulative Period Cumulative2006 2006 2005 2005

$m $m $m $m

Jointly controlled entities

FOXTEL Partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1) 117 80 118Reach Ltd . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (34) 575 (206) 609

Associated entitiesAustralia-Japan Cable Holdings Limited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 143 14 107

1 835 (112) 834


226


31.Employee share plans

The Company has a number of employee share plans that are available for directors, executives and employees, these include:

• the Telstra Employee Share Ownership Plans (TESOP99 and TESOP97); and

• those conducted through the Telstra Growthshare Trust.

The nature of each plan, details of plan holdings, movements in holdings, and other relevant information is disclosed below:

(a) TESOP99 and TESOP97

As part of the Commonwealth’s sale of its shareholding in fiscal 2000 and fiscal 1998 we offered eligible employees the opportunity to buy ordinary shares of Telstra. These share plans were:

• the Telstra Employee Share Ownership Plan II (TESOP99); and • the Telstra Employee Share Ownership Plan (TESOP97).

Participating employees are entitled to receive dividends and voting rights in the shares. Telstra ESOP Trustee Pty Ltd is the trustee for TESOP99 and TESOP97 and holds the shares on behalf of participants. This company is 100% owned by Telstra.

Generally, employees were offered interest free loans by the Telstra Entity to acquire certain shares and in some cases became entitled to certain extra shares and loyalty shares as a result of participating in the plans. All shares acquired under the plans were transferred from the Commonwealth either to the employees or to the trustee for the benefit of the employees.

While a participant remains an employee of the Telstra Entity, a company in which Telstra owns greater than 50% equity, or the company which was their employer when the shares were acquired, there is no date by which the employee has to repay the loan. The loan may, however, be repaid in full at any time by the employee using his or her own funds.

The loan shares, extra shares and in the case of TESOP99, the loyalty shares, were subject to a restriction on the sale of the shares or transfer to the employee for three years, or until the relevant employment ceased. This restriction period has now been fulfilled under each plan.

If a participating employee leaves the Telstra Entity, a company in which Telstra owns greater than 50% equity, or the company which was their employer when the shares were acquired, to acquire the relevant shares the employee must repay their loan within two months of leaving. This is the case except where the restriction period has ended because of the employee’s death or disablement (in this case the loan must be repaid within 12 months).

If the employee does not repay the loan when required, the trustee can sell the shares. The sale proceeds must then be used to pay the costs of the sale and any amount outstanding on the loan, after which the balance will be paid to the employee. The Telstra Entity’s recourse under the loan is limited to the amount recoverable through the sale of the employee’s shares.


227


(a) TESOP99 and TESOP97 (continued)

The following information details the number of outstanding equity instruments and loan balances relevant to the TESOP99 and TESOP97 plans:

The fair value of these shares as at 30 June 2006 based on the market value of Telstra shares at balance date amounts to $203 million (2005: $306 million).

The Telstra ESOP Trustee continues to hold the loan shares where the employee has ceased employment and elected not to repay the loan, until the share price is sufficient to recover the loan amount and associated costs. The Trustee will then sell the shares. As at 30 June 2006, there were 6,418,300 shares held for this purpose (2005: 5,603,100).

The movements in the number of instruments are as follows:

The weighted average loan still to be repaid for the TESOP97 equity instrument is $1.04 (2005: $1.33), and TESOP99 equity instrument is $6.13 (2005: $6.42).

The weighted average share price at the date of the transfers of Telstra shares relating to the exercise of these instruments was $3.95 for TESOP 99 (2005: $4.77) and $3.96 for TESOP 97 (2005: $4.77) based on the closing market price on those dates. The total proceeds received on exercise of TESOP99 was $5 million (2005: $4 million) and TESOP97 was $19 million (2005: $15 million).

31. Employee share plans (continued)

Employee share plansAs at 30 June

2006 2005

Market price of Telstra shares . . . . $3.68 per share $5.06 per shareEmployee share loan balance . . . . $130 million $154 million

TESOP99Remaining number of loan shares . . 14,387,400 14,535,900

TESOP97Remaining number of loan shares . . 32,573,300 36,674,100Remaining number of extra shares . 8,143,325 9,168,525

TESOP97 TESOP99number number

Equity instruments outstanding as at 30 June 2004 . . . . . . . . . . . . . . 48,327,000 14,622,000Exercised . . . . . . . . . . . . . . . . . . (2,484,375) (86,100)Equity instruments outstanding as at 30 June 2005 . . . . . . . . . . . . . . 45,842,625 14,535,900Exercised . . . . . . . . . . . . . . . . . . (5,126,000) (148,500)

Equity instruments outstanding as at 30 June 2006 . . . . . . . . . . . . . . 40,716,625 14,387,400


228


(b) Telstra Growthshare Trust

The Telstra Growthshare Trust commenced in fiscal 2000. Under the trust, Telstra operates a number of different short and long term incentive equity plans whereby the following equity based instruments may be allocated:

• incentive shares;• sign-on bonus shares;• performance rights;• deferred shares;• restricted shares; and• options.

In addition, the following share plans are operated for our non executive directors and certain eligible employees:

• directshares; and• ownshares.

The trustee for the trust is Telstra Growthshare Pty Ltd. This company is 100% owned by Telstra. Funding is provided to the Telstra Growthshare Trust to purchase Telstra shares on the market to underpin the equity instruments issued.

In fiscal 2006, we recorded an expense of $15 million for our share based payments (2005: $10 million). As at 30 June 2006, we had a total expense yet to be recognised of $25 million (2005: $17 million), which is expected to be recognised over a weighted average of 2 years (2005: 2 years).

Our election not to apply AASB 2: “Share based payment” (AASB 2) to equity instruments granted prior to 7 November 2002, as permitted under AASB 1: “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” (AASB 1), has reduced the expense we have recorded, as well as the total expense we are yet to recognise. Refer to note 36(a) for further details.

Short term incentive equity plan

Incentive shares

In fiscal 2006, the Board allocated the executives’ half of their short term incentive payments as rights to acquire Telstra shares. These incentive shares vest in equal parts over a period of one, two and three years on the anniversary of their allocation date, subject to the executive’s continued employment with any entity that forms part of the Telstra Group. The executive can exercise their vested incentive shares at a cost of $1 in total for all of the incentive shares exercised on a particular day.

Once the vested incentive shares are exercised, Telstra shares will be transferred to the executive. Until this time, the executive cannot use the incentive shares (or vested incentive shares) to vote or receive dividends. Any dividends paid by the Company prior to exercise will increase the number of incentive shares allocated to the executive. The Board has decided not to continue the short term incentive share plan and the short term incentive payment for fiscal 2006 will be delivered in cash.

Incentive shares movements during the year

The following incentive shares were granted during fiscal 2006:

During fiscal 2006, 53,467 incentive shares were forfeited due to resignation, and 97,382 incentive shares were exercised as a result of those executives being made redundant. As a result of the above movements, 1,835,586 incentive shares were outstanding as at30 June 2006. There were no incentive shares that were exercisable at 30 June 2006.

The fair value of the August 2005 allocation of incentive shares was $4.77. This was calculated using a Black Scholes option pricing model. The following weighted average assumptions were used in determining the valuation:

Long term incentive equity plans

(i) Nature of share plans

The purpose of the long term incentive plans is to align key executives’ rewards with shareholders’ interests, and reward performance improvement whilst supporting business plans and corporate strategies. These plans are administered through the Telstra Growthshare Trust. The Board determines who is invited to participate in the share plans.


Effective commencement date of instruments 19 August 2005Number of incentive shares issued . . . . . . . 1,986,435Market price of Telstra shares on grant date . $4.77Exercise date - 1 year incentive shares . . . . . 19 August 2006Exercise date - 2 year incentive shares . . . . . 19 August 2007Exercise date - 3 year incentive shares . . . . . 19 August 2008

Expiration date . . . . . . . . . . . . . . . . . . . 2 years from each

exercise date

Growthshareincentive shares

August 2005Risk free rate - 1 year incentive shares . . . . 5.12%Risk free rate - 2 year incentive shares . . . . 5.06%Risk free rate - 3 year incentive shares . . . . 5.06%Expected stock volatility. . . . . . . . . . . . . 15%


229


(b) Telstra Growthshare Trust (continued)

Long term incentive equity plans

(i) Nature of share plans (continued)

Allocations have been made over a number of years in the form of performance rights, restricted shares and options under our long term incentive plan, and deferred shares under our deferred remuneration plan. Instruments issued represent a right to acquire a share in Telstra. Generally, the performance rights, restricted shares and options may only be exercised to acquire Telstra shares if a performance hurdle is satisfied in the performance period and in the case of options, the exercise price is paid by the executive. Deferred shares may only be exercised when a prescribed period of service has been completed.

Performance rights

We have seven types of performance rights on issue. These are:

• total shareholder return (TSR) performance rights - are based on Telstra’s total shareholder return;

• earnings per share (EPS) performance rights - are based on the growth of earnings per share in the year of allocation and two subsequent years;

• operating expense growth (OEG) performance rights - are based on a reduction in Telstra’s operating expenses;

• revenue growth (RG) performance rights - are based on increases in Telstra’s revenue;

• network transformation (NT) performance rights - are based on completion of certain elements in Telstra’s network transformation program;

• information technology transformation (ITT) performance rights - are based on a reduction in the number of business support systems (BSS) and operational support systems (OSS) systems used by companies in the Telstra Group; and

• return on investment (ROI) performance rights - are based on an increase in the earnings before interest and tax for Telstra relative to the average investment.

For all types of performance rights, an executive is not entitled to Telstra shares before the performance rights allocated under Telstra Growthshare become vested performance rights and are therefore exercisable. If the performance hurdle is satisfied during the performance period, a specified number of performance rights as determined in accordance with the trust deed and terms of issue, will become vested performance rights. The vested performance rights can then be exercised at any time before the expiry date, otherwise they will lapse. Once the vested performance rights are exercised, Telstra shares will be transferred to the executive. Until this time, the executive cannot use the performance rights (or vested performance rights) to vote or receive dividends.

Telstra shares will be transferred to the executive on exercise of vested performance rights. The executive may exercise the performance rights at a cost of $1 in total for all of the performance rights exercised on a particular day.

Deferred shares

The executives were previously provided part of their annual fixed remuneration in the form of rights to Telstra shares that vest upon completing certain employment requirements. Generally, if an executive continues to be employed by an entity that forms part of the Telstra Group three years after the commencement date of the instrument, the deferred share will become a vested deferred share.

Vested deferred shares must be exercised before the expiry date, otherwise they will lapse. Once exercised, Telstra shares will be transferred to the executive. Until this time, the executive can not use the deferred shares or vested deferred shares to vote or receive dividends. The executive may exercise the deferred shares at a cost of $1 in total for all of the deferred shares exercised on a particular day.

Restricted shares

The executive is not entitled to Telstra shares before the restricted shares allocated under the trust are exercised. If the performance hurdle is satisfied in the performance period, the restricted shares will vest and may be exercised at any time before the expiry date, otherwise they will lapse. Once the restricted shares have vested, they become restricted trust shares, which will generally be held by the trustee for the executive for a certain period. Once converted into restricted trust shares, the executive has an interest in Telstra shares and is entitled to dividends, other distributions, and voting rights.

Restricted trust shares are held by the Trustee until the earlier of:

• the period determined in accordance with the trust deed;• the executive finishes employment with Telstra; or• a date nominated by the Board.

The executive may exercise restricted shares at a cost of $1 in total for all of the restricted shares exercised on a particular day.



230



(i) Nature of the share plans (continued)

Options

An executive is not entitled to Telstra shares before the options allocated under Telstra Growthshare initially vest, and then are exercised. This means that the executive cannot use options to vote or receive dividends. If the performance hurdle is satisfied in the performance period, options may be exercised at any time before the expiry date otherwise they will lapse. Details of the performance hurdle for options is detailed below.

Once the options are exercised and the option price paid, Telstra shares will be transferred to the executive.

(ii) Performance hurdles

Performance hurdles for instruments issued in fiscal 2006

TSR performance rights

For allocations of TSR performance rights issued in fiscal 2006, the applicable performance hurdle is based on the market value of Telstra shares and the value of accumulated dividends paid to Telstra shareholders. TSR performance rights vest if Telstra’s total shareholder return exceeds certain targets over the performance period, which is the five years to 30 June 2010. If the total shareholder return is:

• equal to the minimum target then 50% of the allocation becomes exercisable (except for the CEO, who will receive 75% of the allocated performance rights);

• between the maximum and minimum targets then the number of exercisable TSR performance rights is scaled proportionately between 50% and 100% (with the exception of the CEO whose number of performance rights is scaled proportionately between 75% and 100%);

• equal to or greater than the maximum target then 100% of the TSR performance rights will become exercisable; or

• is less than the minimum target all TSR performance rights will lapse.

OEG, RG, NT and ITT performance rights

For allocations of the OEG, RG, NT and ITT performance rights issued in fiscal 2006, the performance hurdles for the initial performance period are:

• if the minimum target is achieved in the initial performance period, (1 July 2005 to 30 June 2008) then 50% of the allocation of performance rights will become exercisable (except for the CEO, who will receive 75% of the allocated performance rights);

• if the result achieved is between the maximum and minimum targets, then the number of exercisable performance rights is scaled proportionately between 50% and 100% (with the exception of the CEO whose number of performance rights is scaled proportionately between 75% and 100%);

• if the maximum target is achieved then 100% of the performance rights will become exercisable; or

• if the minimum target is not achieved 25% of the performance rights allocated to the initial performance period will lapse.

Of the performance rights that have not become exercisable in the initial performance period, 75% will be added to the subsequent performance period allocation. The performance targets for the subsequent performance period (1 July 2005 to 30 June 2010) are:

• if the minimum target is met, 50% of the allocation will become exercisable (except for the CEO, who will receive 75% of the allocated performance rights);

• if the result achieved is between the maximum and minimum targets, then the number of exercisable performance rights is scaled proportionately between 50% and 100% (with the exception of the CEO whose number of performance rights is scaled proportionately between 75% and 100%); or

• if the maximum target is achieved then all of the performance rights will become exercisable.

If the minimum target is not met in the subsequent performance period, all performance rights will lapse.

ROI performance rights

For the allocation of ROI performance rights issued in fiscal 2006, if the return on investment is:

• equal to the minimum target then 50% of the allocation will become exercisable (except for the CEO, who will receive 75% of the allocated performance rights);

• between the maximum and minimum targets, the number of exercisable ROI performance rights is scaled proportionately between 50% and 100% (with the exception of the CEO whose number of performance rights is scaled proportionately between 75% and 100%);

• greater than the maximum target then 100% of the ROI performance rights will become exercisable; or

• is less than the minimum target 25% of the allocated ROI performance rights will lapse.

If the ROI performance rights have not become exercisable in this period, 75% of these performance rights will be added to the allocation of TSR performance rights for measurement against the TSR performance hurdle. If this TSR performance hurdle is not achieved, all ROI performance rights will lapse.



231



(ii) Performance hurdles (continued)

Performance hurdle for instruments issued between 30 June 2001 and 30 June 2005

EPS performance rights

The number of EPS performance rights that become vested EPS performance rights, and therefore become exercisable, is based on the following:

• if the cumulative growth in EPS from 1 July 2004 to 30 June 2007 is equal to 15.7% then 50% of the allocation becomes exercisable;

• if the cumulative growth in EPS is greater than 15.7% and less than 33.1% then the number of exercisable performance rights is scaled proportionately between 50% and 100%;

• if the cumulative growth in EPS exceeds 33.1% then 100% of the EPS performance rights will become exercisable; or

• if Telstra does not achieve cumulative growth in EPS of 15.7%, all EPS performance rights will lapse.

TSR performance rights and options

For allocations of TSR performance rights made between 30 June 2001 and 30 June 2005, and options issued during fiscal 2002, the applicable performance hurdle is based on comparing Telstra’s total shareholder return (TSR) with the TSRs of the companies in the S&P/ASX 200 (Industrial) Index (peer group) within the performance period.

The companies in the peer group are anchored at the effective date of allocation, and this same peer group of companies are then tracked during the performance period. At the end of each quarter during the performance period, the 30 day average TSR is calculated for Telstra and the companies in the peer group for each trading day during that quarter.

Both the number of TSR performance rights and the number of options potentially exercisable are based on the following.

If in the first quarter of the performance period, Telstra’s percentile ranking is the 50th percentile or above then:

• the number of TSR performance rights and options that become exercisable for that quarter is scaled proportionately from the 50th percentile (at which 50% of the allocation becomes exercisable) to the 75th percentile (at which 100% of the allocation becomes exercisable); and

• in subsequent quarters, the number that become exercisable is based on the same proportionate scale, but is reduced by the number of performance rights or options that have previously become exercisable. The percentile ranking achieved needs to be above that achieved in previous quarters for additional performance rights and options to become exercisable.

If in the first quarter of the performance period, the percentile ranking is less than the 50th percentile then:

• half of the allocation will lapse; and• in subsequent quarters, the remaining 50% of the options or

performance rights will become exercisable if the ranking is the 50th percentile or above for that quarter.

If Telstra does not achieve or exceed the 50th percentile ranking in any quarter of the performance period, all TSR performance rights and options will lapse.

Performance hurdle for instruments issued prior to 30 June 2001

For all allocations prior to 30 June 2001, which include restricted shares and options, the applicable performance hurdle was that the average Telstra Accumulation Index must exceed the average S&P/ASX 200 (Industrial) Index (replacing the superseded All Industrials Accumulation Index) for thirty consecutive days within the performance period. If the performance hurdle is satisfied for these allocations, all of the relevant options or restricted shares would become exercisable (i.e. they do not become exercisable on a proportionate basis).



232



(ii) Performance hurdles (continued)

The following outlines the targets to be achieved for the fiscal 2006 allocation of performance rights to become exercisable:

(a) The applicable performance hurdle is based on the market value of Telstra shares and the value of accumulated dividends paid to Telstra shareholders. This has been set by the Board.


3 Year performance rights 5 Year performance rights

Initial performance period Subsequent performance period

Minimum target Maximum target Minimum target Maximum target

TSR performance rights . . . . . . . . . N/A N/A (a) (a)

OEG performance rights . . . . . . . . . 2.2% operating

expense growth1.2% operating



expense growth

RG performance rights . . . . . . . . . . 2.0% revenue growth 2.5% revenue growth 2.0% revenue growth 2.5%revenue growth

NT performance rights . . . . . . . . . .

IP Core and Ethernetcomplete by 30 June

2008

IP Core and Ethernetcomplete by 31December 2007

Multi Service Edge, SoftSwitch Platform, Fibre to

the Node and WirelessNGN complete by 30

June 2010

Multi Service Edge, SoftSwitch Platform, Fibre to

the Node and WirelessNGN complete by 31

December 2009

ITT performance rights . . . . . . . . . 350 OSS and BSS

systems250 OSS and BSS



systems

ROI performance rights . . . . . . . . . 23.5% return on

investment24.5% return on

investment N/A N/A


233



(iii) Instruments outstanding at the beginning of fiscal 2006

The following performance rights, deferred shares, restricted shares and options were outstanding at the start of fiscal 2006, but were yet to vest with executives.

As deferred shares are allocated as annual fixed remuneration, there is no performance hurdle. Generally, deferred shares will become vested deferred shares after a specified service period.


Number of instruments outstanding

Commencementdate

Performance hurdle period

Exercise price

Exercise date (once performance hurdle met)

from to anytime before:Growthshare 2001 - Sept 2000 allocation

Options . . . . . . . . . . . . . 2,413,900 8 Sept 2000 8 Sept 2003 8 Sept 2005 $6.28 8 Sept 2010

Restricted shares. . . . . . . . 500,600 8 Sept 2000 8 Sept 2003 8 Sept 2005 $1 per parcel exercised 8 Sept 2005

Growthshare 2001 - March 2001 allocation

Options . . . . . . . . . . . . . 150,000 16 March 2001 16 March 2004 16 March 2006 $6.55 16 March 2011

Restricted shares. . . . . . . . 40,000 16 March 2001 16 March 2004 16 March 2006 $1 per parcel exercised 16 March 2006

Growthshare 2002 - Sept 2001 allocation

Options . . . . . . . . . . . . . 13,325,153 6 Sept 2001 6 Sept 2004 6 Sept 2006 $4.90 6 Sept 2011

TSR Performance rights . . . 1,273,782 6 Sept 2001 6 Sept 2004 6 Sept 2006 $1 per parcel exercised 8 Dec 2006


Options . . . . . . . . . . . . . 1,602,000 14 March 2002 14 March 2005 14 March 2007 $5.63 14 March 2012

TSR Performance rights . . . 136,000 14 March 2002 14 March 2005 14 March 2007 $1 per parcel exercised 14 June 2007


Deferred shares . . . . . . . . 1,774,023 5 Sept 2002 N/A $1 per parcel exercised 5 Sept 2007



Deferred shares . . . . . . . . 18,600 7 March 2003 N/A $1 per parcel exercised 7 March 2008

TSR Performance rights . . . 37,200 7 March 2003 7 March 2006 7 March 2008 $1 per parcel exercised 7 June 2008


Deferred shares . . . . . . . . 2,025,008 5 Sept 2003 N/A $1 per parcel exercised 5 Sept 2008


Growthshare 2004 - February 2004 allocation

Deferred shares . . . . . . . . 18,350 20 Feb 2004 N/A $1 per parcel exercised 20 Feb 2009

TSR Performance rights . . . 36,700 20 Feb 2004 20 Feb 2007 20 Feb 2009 $1 per parcel exercised 20 May 2009

Growthshare 2005 - August 2004 allocation

TSR Performance rights . . . 2,424,714 20 Aug 2004 20 Aug 2007 20 Aug 2009 $1 per parcel exercised 20 Nov 2009

EPS Performance rights. . . . 2,424,714 20 Aug 2004 1 July 2004 30 June 2007 $1 per parcel exercised 20 Nov 2009


234



(iv) Instruments granted during the financial year

The following performance rights were granted in February 2006 in relation to the 2005 long term incentive plan:

The following performance rights were granted in August 2004:


TSR performance

rights

OEG performance

rights RG performance

rights

NT performance

rights

ITT performance

rights

ROI performance

rights Number of executives who were allocated performance rights . . . . . . . . . . . . . . . . . 220 220 220 220 220 220Effective commencement date of instruments 24 Feb 2006 24 Feb 2006 24 Feb 2006 24 Feb 2006 24 Feb 2006 24 Feb 2006

Performance hurdle period - i.e. over what time period executives have to satisfy the performance hurdle for the instruments to vest . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 July 2005 to30 June 2010

1 July 2005 to30 June 2008

1 July 2005 to30 June 2008

1 July 2005 to30 June 2008

1 July 2005 to30 June 2008

1 July 2005 to30 June 2008

Subsequent performance hurdle period . . . . N/A1 July 2005 to30 June 2010

1 July 2005 to30 June 2010

1 July 2005 to30 June 2010

1 July 2005 to30 June 2010 N/A

Number of performance rights issued. . . . . . 571,943 1,143,886 1,143,886 857,914 857,914 1,143,886

Exercise price (once the performance rights become exercisable) . . . . . . . . . . . . . . . .

$1 per parcel ofinstruments

exercised


exercised


exercised


exercised


exercised


exercised

Market price of Telstra shares on commencement date . . . . . . . . . . . . . . . . $3.87 $3.87 $3.87 $3.87 $3.87 $3.87Fair value (per instrument) . . . . . . . . . . . . $0.66 $3.18 $3.18 $3.18 $3.18 $3.37

Exercise date (once the instruments become exercisable) . . . . . . . . . . . . . . . . . . . . . .

any timebefore

19 Aug 2012

any timebefore

19 Aug 2012

any timebefore

19 Aug 2012

any timebefore

19 Aug 2012

any timebefore

19 Aug 2012

any timebefore

19 Aug 2012

TSR performance rights

EPS performance rights

Number of executives who were allocated performance rights . . . . . . . . . . . . . . . . . . . 178 178Effective commencement date of performance rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 Aug 2004 20 Aug 2004

Performance hurdle period - i.e. over what time period executives have to satisfy the performance hurdle for the instruments to vest . . . . . . . . . . .

20 Aug 2007 to20 Aug 2009

1 Jul 2004 to30 Jun 2007

Number of performance rights issued. . . . . . . . . 2,473,000 2,473,000

Exercise price (once the instruments become exercisable) . . . . . . . . . . . . . . . . . . . . . . . . .


exercised


exercised

Market price of Telstra shares on commencement date. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.89 $4.89Fair value (per instrument) . . . . . . . . . . . . . . . $2.63 $4.18Exercise date (once the instruments become exercisable) . . . . . . . . . . . . . . . . . . . . . . . . .

any time before 20 Nov 2009

any time before20 Nov 2009


235



(iv) Instruments granted during the financial year (continued)

The fair value was calculated using a valuation technique that is consistent with the Black Scholes methodology and utilises Monte Carlo simulations. The following weighted average assumptions were

used in determining the valuation:

The expected stock volatility is a measure of the amount by which the price is expected to fluctuate during a period. This was based on historical daily and weekly closing share prices.

As the RG, OEG, NTT, IT and ROI performance rights are not based on market conditions, no adjustment for the expected achievement of the performance hurdles was made in the valuation.


Growthshare performance rights

Feb 2006 Aug 2004

Share price . . . . . . . . . . . . . . . . . . $3.87 $4.89Risk free rate . . . . . . . . . . . . . . . . . 5.20% 5.39%Dividend yield . . . . . . . . . . . . . . . . 6.0% 5.5%Expected stock volatility . . . . . . . . . . 19% 13.1%

Expected life - performance rights . . . .

date theinstruments

becomeexercisable 5.25 years

Expected rate of achievement of TSR performance hurdles . . . . . . . . . . . . 15% 62%


236



(v) Instruments which have been forfeited during the financial year

The following instruments issued to participating employees have been forfeited during the financial year due to cessation of employment:

(vi) Instruments exercised during the financial year

In fiscal 2006, there were 2,000 (2005: nil) options that were exercised from the September 2001 allocation at the exercise price of $4.90. The total proceeds received on exercise of these options was $9,800 (2005: nil). The share price at the date of the transfers of Telstra shares relating to these options was $4.81 (2005: nil).

There were 1,241,282 (2005: nil) performance rights exercised from the September 2001 allocation. These instruments were exercised at various dates throughout the year. The weighted average share price at the date of the transfers of Telstra shares relating to the exercise of these instruments was $4.69 (2005: nil) based on the closing market price on those dates.

There was also 1,516,003 deferred shares (2005: 49,834) that were exercised from the September 2002 allocation, 2,094 (2005: nil) deferred shares from the March 2003 and 500,054 deferred shares (2005: 27,486) that were exercised from the September 2003 allocation. These instruments were exercised at various dates throughout the year. The weighted average share price at the date of the transfers of Telstra shares relating to the exercise of these instruments was $4.43 (2005: $4.87) based on the closing market price on those dates.

The total proceeds received on exercise of our options, deferred shares and performance rights was $10,027 (2005: $8), which includes $9,800 from the exercise of our September 2001 allocation of options.


Instruments forfeitedduring year ended 30 June

Allocation 2006 2005

OptionsSeptember 2000 . . . . . . . . . . . . . - 419,447September 2001 . . . . . . . . . . . . . 888,153 1,631,444March 2002 . . . . . . . . . . . . . . . . - 80,000

Restricted sharesSeptember 2000 . . . . . . . . . . . . . - 86,608

Deferred sharesSeptember 2002 . . . . . . . . . . . . . 41,292 105,856March 2003 . . . . . . . . . . . . . . . . 506 3,500September 2003 . . . . . . . . . . . . . 94,713 116,595

TSR Performance rightsSeptember 2001 . . . . . . . . . . . . . 5,500 158,762March 2002 . . . . . . . . . . . . . . . . - 6,800September 2002 . . . . . . . . . . . . . 180,281 223,096March 2003 . . . . . . . . . . . . . . . . 1,012 7,000September 2003 . . . . . . . . . . . . . 272,118 244,648August 2004. . . . . . . . . . . . . . . . 198,314 48,286February 2006 . . . . . . . . . . . . . . 4,612 -

EPS Performance rightsAugust 2004. . . . . . . . . . . . . . . . 198,314 48,286

OEG Performance rightsFebruary 2006 . . . . . . . . . . . . . . 9,225 -

RG Performance rightsFebruary 2006 . . . . . . . . . . . . . . 9,225 -

NT Performance rightsFebruary 2006 . . . . . . . . . . . . . . 6,918 -

ITT Performance rightsFebruary 2006 . . . . . . . . . . . . . . 6,918 -

ROI Performance rightsFebruary 2006 . . . . . . . . . . . . . . 9,225 -


237



(vii) Instruments which have expired during the financial year

The following instruments issued to participating employees have

expired due to the performance hurdle not being met:

(viii) Instruments outstanding at the end of fiscal 2006

After movements in our share plans during the financial year, the following instruments remain outstanding as at 30 June 2006:

Only the September 2001 allocation of options and TSR performance rights, and the September 2002 allocation of deferred shares have become vested instruments, however, they are yet to be exercised.


Instruments expiredduring year ended 30 June

Allocation 2006 2005

OptionsSeptember 1999 . . . . . . . . . . . . - 1,395,000September 2000 . . . . . . . . . . . . 2,413,900 -March 2001 . . . . . . . . . . . . . . . 150,000 -September 2001 . . . . . . . . . . . . - 16,846,680March 2002 . . . . . . . . . . . . . . . 801,000 -

Restricted sharesSeptember 1999 . . . . . . . . . . . . - 236,500September 2000 . . . . . . . . . . . . 500,600 -March 2001 . . . . . . . . . . . . . . . 40,000 -

TSR Performance rightsSeptember 2001 . . . . . . . . . . . . 1,607,066March 2002 . . . . . . . . . . . . . . . 68,000 -September 2002 . . . . . . . . . . . . 1,865,832 -

Number outstanding

As at 30 June 2006

Growthshare 2002 - Sept 2001 allocationOptions . . . . . . . . . . . . . . . . . . . . . . . . . . 12,435,000TSR Performance rights . . . . . . . . . . . . . . . . 27,000

Growthshare 2002 - March 2002 allocationOptions . . . . . . . . . . . . . . . . . . . . . . . . . . 801,000TSR Performance rights . . . . . . . . . . . . . . . . 68,000

Growthshare 2003 - Sept 2002 allocationDeferred shares . . . . . . . . . . . . . . . . . . . . . 216,728TSR Performance rights . . . . . . . . . . . . . . . . 1,641,111

Growthshare 2003 - March 2003 allocationDeferred shares . . . . . . . . . . . . . . . . . . . . . 16,000TSR Performance rights . . . . . . . . . . . . . . . . 36,188

Growthshare 2004 - Sept 2003 allocationDeferred shares . . . . . . . . . . . . . . . . . . . . . 1,430,241TSR Performance rights . . . . . . . . . . . . . . . . 3,827,428

Growthshare 2004 - February 2004 allocationDeferred shares . . . . . . . . . . . . . . . . . . . . . 18,350TSR Performance rights . . . . . . . . . . . . . . . . 36,700

Growthshare 2005 - August 2004 allocationTSR Performance Rights . . . . . . . . . . . . . . . . 2,226,400EPS Performance Rights . . . . . . . . . . . . . . . . 2,226,400

Growthshare 2006 - February 2006 allocationTSR Performance Rights . . . . . . . . . . . . . . . . 567,331OEG Performance Rights . . . . . . . . . . . . . . . . 1,134,661RG Performance Rights . . . . . . . . . . . . . . . . . 1,134,661NT Performance Rights . . . . . . . . . . . . . . . . . 850,996ITT Performance Rights . . . . . . . . . . . . . . . . 850,996ROI Performance Rights . . . . . . . . . . . . . . . . 1,134,661



238


(ix) Summary of movements

(i) The incentive shares exercisable relate to those executives that have been made redundant and are then consequently entitled to the incentive shares.

(ii) Performance rights include TSR, EPS, OEG, RG, NT, ITT and ROI performance rights.


Incentive shares (i) Options Restricted shares Deferred shares Performance rights (ii)

Number

Weighted average fair

value Number


value Number


value Number


value Number


value

Equity instruments outstanding as at 30 June 2004 . . . . . . . . . - - 37,863,624 $1.18 863,708 $4.18 4,139,252 $4.34 11,517,824 $2.98Granted. . . . . . . . . . . . . . . . - - - - - - - - 4,946,000 $3.41Forfeited . . . . . . . . . . . . . . . - - (2,130,891) $1.22 (86,608) $3.62 (225,951) $4.34 (736,878) $3.04Exercised . . . . . . . . . . . . . . . - - - - - - (77,320) $4.37 - -Expired . . . . . . . . . . . . . . . . - - (18,241,680) $1.15 (236,500) $5.64 - - (1,607,066) $2.86Equity instruments outstanding as at 30 June 2005 . . . . . . . . . - - 17,491,053 $1.20 540,600 $3.63 3,835,981 $4.34 14,119,880 $3.14Granted. . . . . . . . . . . . . . . . 1,986,435 $4.77 - - - - - - 5,719,429 $2.97Forfeited . . . . . . . . . . . . . . . (150,849) $4.77 (888,153) $1.13 - - (136,511) $4.32 (901,662) $3.19Exercised . . . . . . . . . . . . . . . - - (2,000) $1.13 - - (2,018,151) $4.38 (1,241,282) $2.86Expired . . . . . . . . . . . . . . . . - - (3,364,900) $1.49 (540,600) $3.63 - - (1,933,832) $2.99Equity instruments outstanding as at 30 June 2006 . . . . . . . . . 1,835,586 $4.77 13,236,000 $1.13 - - 1,681,319 $4.30 15,762,533 $3.12

Equity instruments exercisable as at 30 June 2006 . . . . . . . . . 105,899 $4.77 12,435,000 $1.13 - - 216,728 $4.41 27,000 $2.86


239



Telstra directshare and ownshare

(i) Nature of Telstra directshare and ownshare

Telstra directshare

Non-executive directors are required to sacrifice a minimum of 20%of their fees toward the acquisition of restricted Telstra shares, known as directshares. Shares are acquired by the trustee from time to time and allocated to the participating directors on a 6 monthly basis, on dates determined by the trustee at its discretion. Although the trustee holds the shares in trust, the participant retains the beneficial interest in the shares (dividends, voting rights, bonuses and rights issues) until they are transferred at expiration of the restriction period.

The restriction period continues:

• for five years from the date of allocation of the shares;• until the participating director is no longer a director of, or is no

longer employed by, a company in the Telstra Group; or • until the Board of Telstra determines that an ‘event’ has occurred.

At the end of the restriction period, the directshares will be transferred to the participating director. The participating director is not able to deal in the shares until this transfer has taken place.

The expense associated with shares allocated under this plan is included in the disclosure for directors’ remuneration.

Telstra ownshare

Certain eligible employees may be provided part of their remuneration in Telstra shares. Those employees indicate a preference to be provided Telstra shares as part of their remuneration. Shares are acquired by the trustee from time to time and allocated to these employees at the time their application is accepted. Although the trustee holds the shares in trust, the participant retains the beneficial interest in the shares (dividends, voting rights, bonuses or rights issues) until they are transferred at expiration of the restriction period.


• for three years or five years depending on the elections available to the participant at the time of allocation;

• until the participant ceases employment with the Telstra Group; or • until the Board of Telstra determines that an ‘event’ has occurred.

At the end of the restriction period, the ownshares will be transferred to the participant. The participant is not able to deal in the shares until this transfer has taken place.

(ii) Instruments outstanding at the beginning of fiscal 2006

The following directshares and ownshares were outstanding at the start of fiscal 2006 but were held by the trustee for the benefit of the relevant directors or employees pending expiration of the restriction period:


Directshares

Number ofinstrumentsoutstanding

15 September 2000 allocation . . . . . . . . . . . . . . 4,36419 March 2001 allocation . . . . . . . . . . . . . . . . . 7,43914 September 2001 allocation . . . . . . . . . . . . . . 9,46314 March 2002 allocation . . . . . . . . . . . . . . . . . 11,8575 September 2002 allocation . . . . . . . . . . . . . . . 12,9377 March 2003 allocation . . . . . . . . . . . . . . . . . . 29,9225 September 2003 allocation . . . . . . . . . . . . . . . 23,13220 February 2004 allocation . . . . . . . . . . . . . . . 26,36920 August 2005 allocation . . . . . . . . . . . . . . . . . 7,56719 February 2005 allocation . . . . . . . . . . . . . . . 26,013

159,063

Ownshares15 September 2000 allocation . . . . . . . . . . . . . . 49,92814 September 2001 allocation . . . . . . . . . . . . . . 47,2025 September 2002 allocation . . . . . . . . . . . . . . . 471,13528 October 2002 allocation . . . . . . . . . . . . . . . . 138,2325 September 2003 allocation . . . . . . . . . . . . . . . 333,58731 October 2003 allocation . . . . . . . . . . . . . . . . 207,14020 August 2004 allocation . . . . . . . . . . . . . . . . . 318,07429 October 2004 allocation . . . . . . . . . . . . . . . . 247,168

1,812,466


240



(iii) Instruments granted during the financial year

The following directshares were granted in August and February of fiscal 2006 and fiscal 2005:

The following ownshares were granted in August and October of fiscal 2006 and fiscal 2005:

On an allocation of directshares and ownshares, the participants in the plans are not required to make any payment to the Telstra Entity. The August allocation of ownshares relates to employees short term incentive payments and the October allocation relates to shares acquired through salary sacrifice by employees.

The fair value of the instruments issued is determined by the remuneration foregone by the participant. The number of directshares or ownshares allocated is based on the weighted average price of a Telstra share in the week ending on the day before allocation date, in conjunction with the remuneration foregone.


Directshare Equity Plan Aug 2005 Feb 2006 Aug 2004 Feb 2005

Number of eligible non-executive directors . . . . . . . .Number of participants in the plan . . . . . . . . . . . . .Grant date of shares . . . . . . . . . . . . . . . . . . . . . .Number of shares allocated . . . . . . . . . . . . . . . . . .Fair value of shares allocated. . . . . . . . . . . . . . . . .Total fair value of shares allocated . . . . . . . . . . . . .

6 6 8 86 6 8 8

19 August 2005 17 February 2006 20 August 2004 19 February 200520,699 31,286 7,567 26,013

$4.78 per share $4.05 per share $4.89 per share $5.29 per share$98,941 $126,708 $37,003 $137,609

Ownshare Equity Plan Aug 2005 Oct 2005 Aug 2004 Oct 2004

Number of eligible participants . . . . . . . . . . . . . . . 9,612 17,559 8,975 16,062Number of participants in the plan . . . . . . . . . . . . .Grant date of shares . . . . . . . . . . . . . . . . . . . . . .Number of shares allocated . . . . . . . . . . . . . . . . . .Fair value of shares allocated. . . . . . . . . . . . . . . . .Total fair value of shares allocated . . . . . . . . . . . . .

414 151 311 17319 August 2005 28 October 2005 20 August 2004 29 October 2004

506,420 270,415 348,240 250,386$4.78 per share $4.18 per share $4.89 per share $4.67 per share

$2,420,688 $1,130,335 $1,702,894 $1,169,303


241



(iv) Instruments exercised during the financial year

Directshares and ownshares are not required to be exercised. The fully paid shares held by the Telstra Growthshare Trust relating to these instruments are merely transferred to the participants at the completion of the restriction period.

The following fully paid shares have been distributed from the Telstra Growthshare Trust at various dates throughout fiscal 2006 to directors and executives under the directshare and ownshare plans respectively:

The following fully paid shares relating to the same plans were distributed during fiscal 2005:

The fair value of directshares and ownshares distributed is determined through reference to the closing market price of a Telstra share on the date of transfer.

(v) Instruments outstanding at the end of fiscal 2006

Sign-on bonus shares

Certain eligible employees may be provided sign-on bonus shares upon commencing employment at Telstra. These shares are held in trust, although the participant retains the beneficial interest in the shares (dividends, voting rights, bonuses or rights issues) until they are transferred at expiration of the restriction period.


• until a date determined by the chief executive officer; or• until the Board of Telstra determines that an ‘event’ has occurred.

At the end of the restriction period, the sign-on bonus shares will be transferred to the participating employee. The employee is not able to deal in the shares until this transfer has taken place.

There were 67,694 (2005: nil) sign-on bonus shares issued in fiscal 2006 to one employee (2005: nil) on 30 March 2006. The fair value of the shares allocated was $3.69 with a total fair value allocated of $249,791. These shares were still outstanding at 30 June 2006.

The fair value of the sign-on bonus shares is based on the weighted average price of a Telstra share in the week ending on the day before allocation date.


No. of shares distributed Fair value

Directshares . . . . . . . . . . . . . . . . 45,060 $189,415Ownshares . . . . . . . . . . . . . . . . . 901,607 $3,763,870

No. of shares distributed Fair value

Directshares . . . . . . . . . . . . . . . . 13,644 $68,629Ownshares . . . . . . . . . . . . . . . . . 425,950 $2,033,620

Directshares

No. of instrumentsoutstanding as at

30 June 200614 September 2001 allocation . . . . . . . . . . . 5,61614 March 2002 allocation . . . . . . . . . . . . . . 8,3485 September 2002 allocation . . . . . . . . . . . . 8,9337 March 2003 allocation . . . . . . . . . . . . . . . 23,8795 September 2003 allocation . . . . . . . . . . . . 18,48820 February 2004 allocation. . . . . . . . . . . . . 21,38020 August 2005 allocation . . . . . . . . . . . . 6,22319 February 2005 allocation. . . . . . . . . . . . . 21,13619 August 2005 allocation . . . . . . . . . . . . . . 20,69917 February 2006 allocation. . . . . . . . . . . . . 31,286

165,988

Ownshares

No. of instrumentsoutstanding as at

30 June 200614 September 2001 allocation . . . . . . . . . . . . 32,3955 September 2003 allocation . . . . . . . . . . . . . 293,76431 October 2003 allocation . . . . . . . . . . . . . . 165,93220 August 2004 allocation . . . . . . . . . . . . . . . 282,03129 October 2004 allocation . . . . . . . . . . . . . . 194,08419 August 2005 allocation . . . . . . . . . . . . . . . 474,23728 October 2005 allocation . . . . . . . . . . . . . . 245,251

1,687,694


242


Our key management personnel (KMP) have authority and responsibility for planning, directing and controlling the activities of the Telstra Group. Our KMP consist of:

• the directors’ of the Telstra Entity; and• certain executives in the Chief Executive Officer’s (CEO’s) senior

leadership team, referred to as a ‘senior executive’ in this report.

Directors

During fiscal 2006 and fiscal 2005, the directors’ of the Telstra Entity were:

Senior executives

On 1 July 2005, Mr Solomon Trujillo was appointed CEO and Executive Director. Subsequent to Mr Trujillo’s appointment, we reassessed our KMP in light of the new organisational structure. The senior executives that qualified as KMP for the current year were:

32. Key management personnel compensation

Name Position

Current directorsDonald G McGauchie Chairman, Non Executive Director, appointed Chairman 20 July 2004Solomon D Trujillo Chief Executive Officer and Executive Director, appointed 1 July 2005Belinda J Hutchinson Non Executive Director, Catherine B Livingstone Non Executive Director, Charles Macek Non Executive Director, John W Stocker Non Executive Director, Peter Willcox Non Executive Director, appointed 17 May 2006John Zeglis Non Executive Director, appointed 17 May 2006

Former directorsJohn T Ralph Deputy Chairman, Non Executive Director, retired 11 August 2005 Zygmunt E Switkowski Chief Executive Officer and Executive Director, resigned 1 July 2005Samuel H Chisholm Non Executive Director, resigned 28 October 2004Anthony J Clark Non Executive Director, retired 11 August 2005John E Fletcher Non Executive Director, resigned 30 June 2006

Name Position

Fiscal 2006 senior executivesBruce Akhurst Chief Executive Officer, SensisKate McKenzie Group Managing Director, Telstra Wholesale, appointed 16 January 2006David Moffatt Group Managing Director, Telstra Consumer Marketing and ChannelsDeena Shiff Group Managing Director, Telstra Business, appointed 30 January 2006; previously Group Managing Director

Telstra Wholesale from 1 January 2005 to 30 January 2006John Stanhope Chief Financial Officer and Group Managing Director, Finance and AdministrationDavid Thodey Group Managing Director, Telstra Enterprise and GovernmentGregory Winn Group Managing Director, Telstra Operations, appointed 11 August 2005


243


32. Key management personnel compensation (continued)

Senior executives (continued)

During fiscal 2005, the senior executives that formed part of our KMP were:

Certain senior executives classified as KMP in the prior year have either resigned, retired or are no longer considered KMP for the purposes of the applicable accounting standard in fiscal 2006.

KMP aggregate compensation

During fiscal 2006 and fiscal 2005, the aggregate compensation provided to our KMP was:

The compensation for each individual KMP with additional details regarding the category of compensation is provided on the following pages.

Name Position

Fiscal 2005 senior executivesBruce Akhurst Chief Executive Officer, Sensis, appointed 1 January 2005; previously Group General Council and Group

Managing Director, Telstra Wholesale, Telstra Broadband and Media until 31 December 2004 Douglas Campbell Group Managing Director, Telstra Country Wide, retired 31 December 2005David Moffatt Group Managing Director, Telstra Consumer and MarketingTed Pretty Group Managing Director, Telstra Technology, Innovation and Products, ceased 19 August 2005Michael Rocca Group Managing Director, Infrastructure ServicesBill Scales Group Managing Director, Regulatory, Corporate and Human Relations, retired 12 August 2005 Deena Shiff Group Managing Director, Telstra Wholesale appointed 1 January 2005John Stanhope Chief Financial Officer and Group Managing Director, Finance and AdministrationDavid Thodey Group Managing Director, Telstra Enterprise and Government


2006 2005 2006 2005$m $m $m $m

Short term employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,841,244 16,183,799 21,841,244 16,183,799Post employment benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,029,681 1,468,559 2,029,681 1,468,559Other long term benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245,279 272,833 245,279 272,833Termination benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,027,495 - 4,027,495 -Equity settled share based payments . . . . . . . . . . . . . . . . . . . . . . . . 4,907,315 9,249,062 4,907,315 9,249,062

33,051,014 27,174,253 33,051,014 27,174,253



244

KMP individual compensation

During fiscal 2006, the compensation provided to each individual KMP was:


Short term employee benefits Post employment Otherlong term

benefits$

Termin-ation

benefits$

Equity settled share based payments Total


Salary &fees

$

Short termincentives

$

Non-monetary

$Other

$

Superan-nuation

$

Retirementbenefits

$


$Directshare

$

Deferredshares

$

Otherequity

$ $DirectorsD McGauchie . . 312,236 - 3,078 - 12,158 60,094 - - - 81,099 - - 468,665J Ralph (a) (e) . . 17,474 - 380 - - - - 462,548 - - - - 480,402S Trujillo (b) (c) . 2,987,861 2,581,200 - 1,745,011 1,012,139 - 75,000 - - - - 309,305 8,710,516Z Switkowski (a) (d) . . . . . . . . . 5,451 - 35 - 281 - - 3,151,526 - - 491,049 4,516 3,652,858A Clark (a) (e) . . 9,015 - 458 - 970 - - 278,846 - - - - 289,289J Fletcher (a) (e) . 94,209 - 2,775 - 8,056 - - 134,575 - 26,422 - - 266,037B Hutchinson . . 100,611 - 2,288 - 18,551 11,943 - - - 29,740 - - 163,133C Livingstone . . 113,063 - 2,288 - 10,998 11,849 - - - 31,015 - - 169,213C Macek. . . . . . 123,032 - 2,748 - 11,227 12,099 - - - 33,565 - - 182,671J Stocker . . . . . 110,817 - 2,288 - 39,006 13,026 - - - 37,390 - - 202,527P Willcox (b) . . . 11,872 - - - 1,069 - - - - 3,235 - - 16,176J Zeglis (b) . . . . 12,941 - - - - - - - - 3,235 - - 16,176

3,898,582 2,581,200 16,338 1,745,011 1,114,455 109,011 75,000 4,027,495 - 245,701 491,049 313,821 14,617,663Senior executivesB Akhurst . . . . . 984,974 1,519,035 11,740 - 188,026 - 29,325 - 276,443 - 115,592 650,036 3,775,171K McKenzie (b). . 223,280 180,950 - - 20,787 - 6,026 - 22,067 - - 30,871 483,981D Moffatt . . . . . 876,970 1,019,991 18,138 - 316,030 - 29,825 - 131,095 - 129,101 779,461 3,300,611D Shiff. . . . . . . 645,857 768,951 6,062 - 116,643 - 20,000 - 155,829 - 37,438 214,391 1,965,171J Stanhope . . . . 919,499 655,412 9,668 - 101,001 - 25,825 - 126,792 - 76,968 335,804 2,250,969D Thodey . . . . . 1,031,086 926,798 8,248 - 52,914 - 27,100 - 108,869 - 105,198 560,789 2,821,002G Winn (b) (f) . . 1,280,944 1,408,918 1,685 1,101,907 10,814 - 32,178 - - - - - 3,836,446

5,962,610 6,480,055 55,541 1,101,907 806,215 - 170,279 - 821,095 - 464,297 2,571,352 18,433,3519,861,192 9,061,255 71,879 2,846,918 1,920,670 109,011 245,279 4,027,495 821,095 245,701 955,346 2,885,173 33,051,014


245


KMP individual compensation (continued)

(a) These personnel retired or resigned from their position during fiscal 2006. After the date of retirement or resignation, these personnel were not considered to be KMP. As a result, the disclosed compensation includes only compensation during their period of services as a KMP.

(b) These personnel were appointed to the position during fiscal 2006. Prior to the date of appointment, these personnel were not considered to be KMP. As a result, the disclosed compensation includes only compensation from the date of appointment.

(c) On commencement of employment, Mr Trujillo received a one-off sign-on bonus of $1,000,000. This bonus was subsequently transferred to superannuation during fiscal 2006.

In addition, Mr Trujillo received a sign-on incentive in the amount of 50% of his maximum potential benefit under the short term incentive plan ($1,500,000), which has been included in short term incentives. The amount of the sign-on incentive was deducted from his potential short term incentive for the first year of employment.

Other compensation for Mr Trujillo relates to compensation provided for tax equalisation, travel, accommodation and certain relocation costs.

(d) Dr Switkowski ceased employment with the Company effective1 July 2005. As a result, Dr Switkowski’s compensation includes one day of benefits, together with his termination benefits and equity settled share based payments.

Termination benefits relate to entitlements under Dr Switkowski’s employment contract, equal to 12 months fixed remuneration, in addition to accrued annual leave and long service leave entitlements. Fixed remuneration comprises salary, superannuation and the value of salary sacrificed items.

Other equity compensation represents one day of expense for various instruments, including options, performance rights and restricted shares. These instruments are subject to performance hurdles and may become exercisable in future reporting periods. Refer note 33 for further details on Dr. Switkowski’s holdings of equity instruments upon leaving the Company.

Upon ceasing employment, the deferred shares previously allocated to Dr Switkowski vested and became immediately exercisable. As such, the unamortised amount of compensation was immediately recognised.

(e) Termination benefits paid during fiscal 2006 are to directors that resigned or retired during the year. Termination benefits represent the payment of retirement benefits that accumulated during the period of employment.

(f) Other compensation for Mr Winn comprises a one-off sign-on bonus of $500,000 and compensation provided for tax equalisation, travel, accommodation and certain relocation costs.




246

(


During fiscal 2005, the compensation provided to each individual KMP was:


Short term employee benefits Post employment Other longterm

benefits$

Equity settled share based payments Total


Salary &fees

$


$

Non-monetary

$Other

$

Superan-nuation

$

Retirementbenefits

$Directshare

$

Deferredshares

$

Otherequity

$ $DirectorsD McGauchie . . . . . . 225,503 - 2,317 2,837 11,484 195,396 - 60,054 - - 497,591J Ralph . . . . . . . . . . 142,957 - 2,253 - - 79,940 - 19,305 - - 244,455Z Switkowski . . . . . . 1,830,900 1,961,000 24,357 - 101,850 - 52,300 - 725,912 2,045,313 6,741,632S Chisholm (a) . . . . . . - - - - - - - - - - -A Clark . . . . . . . . . . 75,706 - 2,753 - 8,493 48,811 - 13,114 - - 148,877J Fletcher . . . . . . . . . 43,795 - 3,015 - 6,705 35,603 - 40,000 - - 129,118B Hutchinson . . . . . . 70,065 - 2,253 - 6,692 32,004 - 19,189 - - 130,203C Livingstone . . . . . . 77,764 - 2,253 - 8,537 46,216 - 21,575 - - 156,345C Macek. . . . . . . . . . 79,584 - 2,057 - 8,717 40,160 - 22,075 - - 152,593J Stocker . . . . . . . . . 71,975 - 2,253 - 6,478 73,130 - 52,173 - - 206,009

2,618,249 1,961,000 43,511 2,837 158,956 551,260 52,300 247,485 725,912 2,045,313 8,406,823Senior executivesB Akhurst . . . . . . . . . 927,664 523,600 11,893 - 177,086 - 29,325 - 196,141 732,594 2,598,303D Campbell. . . . . . . . 941,394 310,600 10,149 - 88,356 - 26,825 - 196,141 732,354 2,305,819D Moffatt (c) . . . . . . . 1,133,165 248,300 18,781 400,000 11,585 - 29,825 - 220,968 801,183 2,863,807T Pretty (c) . . . . . . . . 1,120,581 540,500 22,370 260,000 24,169 - 29,825 - 224,936 789,217 3,011,598M Rocca. . . . . . . . . . 735,791 416,600 9,817 - 140,459 - 23,375 - 145,754 401,479 1,873,275B Scales . . . . . . . . . . 681,167 428,700 9,635 - 117,583 - 21,625 - 121,946 326,788 1,707,444D Shiff (b). . . . . . . . . 277,321 295,150 1,326 - 47,680 - 8,058 - 30,641 102,562 762,738J Stanhope . . . . . . . . 800,685 240,150 11,398 - 99,065 - 24,575 - 105,628 365,338 1,646,839D Thodey . . . . . . . . . 966,890 206,200 8,375 - 52,360 - 27,100 - 176,235 560,447 1,997,607

7,584,658 3,209,800 103,744 660,000 758,343 - 220,533 - 1,418,390 4,811,962 18,767,43010,202,907 5,170,800 147,255 662,837 917,299 551,260 272,833 247,485 2,144,302 6,857,275 27,174,253


247



(a) During fiscal 2005, Mr Chisholm declined to receive fees for his Board duties to Telstra. Mr Chisholm resigned during fiscal 2005.

(b) Ms Shiff was appointed to the position of Group Managing Director during fiscal 2005. Prior to the date of appointment, Ms Shiff was not considered to be a KMP. As a result, the disclosed compensation includes only compensation from the date of appointment.

(c) Relates to annual contract payments made to certain executives for continued service with Telstra or as part of their employment contract. These payments were determined at the executives’ initial entry into their contract for employment with the Company.

Principles of compensation

Our directors are remunerated in accordance with the constitution, which provides for the aggregate limit for directors’ fees to be set and varied only by approval of a resolution at the annual general meeting of shareholders. Our constitution provides that the allocation of fees to directors within the pool limit shall be determined by the Board.

In order to maintain the directors independence and impartiality, the compensation of the non-executive directors is not linked to the performance of the Company, except through their participation in Directshares. Our directors must sacrifice at least 20% of their fees into Telstra shares to align their interests with those of our shareholders, refer to note 31 for further details on Directshares.

The Telstra Entity has a Remuneration Committee, which is a committee of Board members responsible for reviewing and recommending to the Board the compensation arrangements for the CEO and executives, which includes the senior executives defined as KMP.

Our compensation structure includes both fixed remuneration and performance incentives designed to complement each other and support the execution of our business strategy in both the short and long term. Fixed compensation comprised salary, superannuation and the value of salary sacrificed items.

We reward our senior executives for performance through a combination of short term incentives (STI) and long term incentives (LTI). The STI rewards the CEO and executives for meeting or exceeding specific key annual business and individual performance measures. Measures and targeted achievement levels are reviewed each year to reflect changes in the business priorities for the forthcoming year.

The STI in relation to fiscal 2006 will be delivered in cash. The STI in relation to fiscal 2005 was allocated half in cash and half in rights to Telstra shares, called ‘incentive shares’. The cash portion of the fiscal 2005 STI was included in short term employee benefits during fiscal 2005 and the incentive shares component was included in equity settled share based payments during fiscal 2006 to represent when the instruments were granted.

The incentive shares vest equally over a period of one, two and three years on the anniversary of their allocation date, subject to the executives’ continued employment with any entity that forms part of the Telstra Group. The first third granted will vest on 19 August 2006.

In fiscal 2005, Mr Scales and Dr Switkowski were the only senior executives that received their STI in cash, as they ceased employment with the Company prior to the allocation of the equity component.

The LTI is intended to support our business strategy by aligning executive compensation with key performance measures and targets that support our transformation. On an annual basis, we invite selected executives who contribute significantly to sustained improvement in shareholder value to participate in an equity based LTI plan, administered through Growthshare. LTI equity instruments issued through the trust can only be exercised to obtain normal ordinary shares between certain time periods and if specific long term Company performance hurdles have been achieved.

During fiscal 2006 and fiscal 2005, our executives received performance rights which will vest in future reporting periods depending upon the company’s achievement of the relevant performance measures. The performance rights have been recorded in other equity in the KMP individual compensation tables.

During fiscal 2005, our deferred share program was discontinued.As the deferred shares will continue to vest over the relevant performance periods, a portion of the value of the deferred shares will continue to be allocated to the executive’s compensation until all deferred shares have vested or lapsed. This treatment is consistent with our other equity plans which have been discontinued, such as our option plan and restricted share plan. The deferred shares have been recorded as deferred remuneration in the KMP individual compensation tables.

For further details of our LTI plans, including detailed explanation of performance hurdles and allocations, refer to note 31.

We recognise an expense for all share-based compensation determined with reference to the fair value at grant date of the equity instruments issued. The fair value is reflected in the KMP’s compensation over the relevant vesting periods, adjusted to reflect actual and expected levels of vesting. Refer to note 2.25 for details on our accounting policy for equity settled share based payments.



248


Individual contracts for services

There are no individual contracts for service with our non-executive directors other than retirement benefits classified as post employment benefits. Only directors appointed prior to 30 June 2002 are eligible to receive retirement benefits upon leaving office.

Our individual senior executives are employed under contracts without a fixed duration, except Mr Winn who was appointed on a two year fixed duration contract. Where both parties mutually agree, Mr Winn’s contract can be extended for a further one year.

Where Telstra terminates an executives’ employment prior to the expiration of their employment contract for reasons other than for misconduct, the senior executive is entitled to between 1 and 6 months notice depending on their respective contract conditions. Alternatively, the individual is entitled to payment in lieu of notice and between 6 and 12 months pay depending on their respective contract conditions. Both elements are calculated on fixed remuneration at the time of termination.

We have included detailed disclosures in relation to the principles of compensation and individual contracts for services in the Remuneration Report, which forms part of the Directors’ Report for the year ended 30 June 2006. In accordance with the Corporations Amendment Regulations 2006 (No.4), 2001, please refer to the Remuneration Report for detailed commentary.



249


Transactions involving our controlled entities

Our transactions with our controlled entities recorded in the income statement and balance sheet are as follows:

(a) The Telstra Entity sold and purchased goods and services and received and paid interest to its controlled entities. These transactions are in the ordinary course of business and are on normal commercial terms and conditions.

The Telstra Entity and certain Australian controlled entities have entered into a deed of cross guarantee. Under this deed, each company (except Telstra Finance Limited) guarantees the payment in full of the debts of the other named companies in the event of their winding up. Refer to note 29 for further details regarding our closed group.

Details of our individual significant transactions involving our controlled entities during fiscal 2006 are detailed as follows:

• the Telstra Entity received procurement fees from its controlled entity Sensis Pty Ltd for the use of Yellow Pages® and White Pages® trademarks amounting to $647 million (2005: $628 million). As at 30 June 2006, the Telstra Entity recorded revenue received in advance amounting to $332 million (2005: $344 million) for the use of these trademarks;

• the Telstra Entity paid management fees to its controlled entity Sensis Pty Ltd amounting to $218 million (2005: $211 million) for undertaking agency and contract management services for the national directory service; and

• the Telstra Entity received income from its controlled entity Telstra Multimedia Pty Ltd amounting to $292 million (2005: $284 million) for access to ducts that store the national hybrid fibre coaxial (HFC) cable network.

33. Related party disclosures

Telstra Group Telstra EntityYear ended/As at Year ended/As at

30 June 30 June2006 2005 2006 2005

Note $m $m $m $m

Income from controlled entities:Sale of goods and services (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 1,092 1,072Finance income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 3 5Dividend revenue (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - - 560 223

Expenses to controlled entities:Purchase of goods and services (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 399 362Finance costs (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 20 19

Impairment of receivables:Impairment in amounts owed by controlled entities (c) . . . . . . . . . . . . . . . . .7(a) - - 382 475Reversal of impairment in amounts owed by controlled entities (c) . . . . . . . . . .7(a) - - - (15)

Total amounts receivable at 30 June from:CurrentControlled entities (a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 - - 2,267 2,194Allowance for amounts owed by controlled entities (c) . . . . . . . . . . . . . . . . . . .11 - - (1,851) (1,469)

- - 416 725

Non currentControlled entities (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11 - - 60 56

Total amounts payable at 30 June to:CurrentControlled entities - payables (a) (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17 - - 197 5Controlled entities - loans (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 - - 1,408 2,400

- - 1,605 2,405


250


Transactions involving our controlled entities (continued)

(b) The Telstra Entity recorded dividend revenue during fiscal 2006 from the following controlled entities:

• Network Design and Construction Limited of $200 million (2005: $nil); and

• Telstra International Limited of $360 million (2005: $nil).

During fiscal 2005, the Telstra Entity recognised tax consolidation distributions from certain wholly owned Australian entities amounting to $223 million in relation to tax losses incurred by these entities that were able to be utilised by the Telstra Entity. This was on the basis that no tax funding arrangement was in place between the entities within the tax consolidated group. Refer to note 9 for further details on tax consolidation.

(c) The profit before income tax expense of the Telstra Entity included an impairment loss of $382 million (2005: $475 million) relating to a movement in allowance for amounts owed by a controlled entity. Refer to note 25 for further details regarding impairment.

(d) The Telstra Entity and its Australian controlled entities have formed a tax consolidated group, which is treated as a single entity for income tax purposes.

During fiscal 2006, the entities within the tax consolidated group entered into a tax funding arrangement. The amounts receivable or amounts payable to the Telstra Entity under this arrangements are due in the next financial year upon final settlement of the current tax payable for the tax consolidated group. During fiscal 2005, no tax funding arrangement was in place and as a result, these funding amounts were recorded in our investment in controlled entities. Refer to note 9 for further details on tax consolidation.

(e) The Telstra Entity operates a current account with some of its Australian controlled entities, being an internal group bank account used to settle transactions with its controlled entities or between two controlled entities. Cash deposit balances in the current account owed to our controlled entities are recorded as loans. All loan balances with our controlled entities are unsecured, with settlement required in cash. Refer to note 18 for further discussion on our borrowings.

Transactions involving our parent entity

The Commonwealth of Australia is the ultimate parent and controlling entity of the Telstra Group. Telstra Corporation Limited is the parent entity in the Telstra Group comprising the Telstra Entity and its controlled entities.

We supply telecommunications services to, and acquire other services from, the Commonwealth of Australia, its Departments of State, trading and other agencies. These transactions are made within normal customer/supplier relationships on terms and conditions no more favourable than those available to other customers or suppliers. There are no exclusive rights to supply any of these services.

Services provided to any one governmental department or agency or the combination of all of these services in total, do not represent a significant component of our operating revenues. For these reasons, the financial report does not disclose transactions relating to the purchase and sale of goods and services from or to the Commonwealth of Australia, its Departments of State, trading and other agencies.

33. Related party disclosures (continued)


251


Transactions involving our jointly controlled and associated entities

Our transactions with our jointly controlled and associated entities recorded in the income statement and balance sheet are as follows:

(a) We sold and purchased goods and services, and received interest from our jointly controlled and associated entities. These transactions are in the ordinary course of business and are on normal commercial terms and conditions.

Details of our individual significant transactions involving our jointly controlled and associated entities during fiscal 2006 are detailed as follows:

• we purchased pay television services amounting to $250 million (2005: $218 million) from our jointly controlled entity FOXTEL.The purchases were to enable the resale of FOXTEL services, including pay television content, to our existing customers as part of our ongoing product bundling initiatives. In addition, we made sales for our cost recoveries from FOXTEL of $77 million (2005:$55 million); and

• purchases were made by the Telstra Group of $198 million (2005: $226 million) and Telstra Entity of $192 million (2005: $192 million) from our jointly controlled entity Reach Ltd (Reach) in line with market prices. These were for both the purchase of, and entitlement to, capacity and connectivity services. Sales were made for international inbound call termination services, construction and consultancy by the Telstra Group of $61 million (2005: $71 million) and the Telstra Entity of $52 million (2005:$62 million) to Reach.


Telstra Group Telstra EntityYear ended/As at Year ended/As at

30 June 30 June2006 2005 2006 2005

Note $m $m $m $m

Income from jointly controlled and associated entities:Sale of goods and services (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 165 83 97Finance income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - - 18Dividend revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 - - - 1

Expenses to jointly controlled and associated entities:Purchase of goods and services (a). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 510 533 245 277

Impairment of receivables:Impairment in amounts owed by jointly controlled entities . . . . . . . . . . . . . . .7(a) 2 5 - -

Total amounts receivable at 30 June from:CurrentJointly controlled and associated entities - trade debtors (a) . . . . . . . . . . . . . . . . 32 16 22 12

Non currentJointly controlled and associated entities - loans (b) . . . . . . . . . . . . . . . . . . . .11 229 242 210 204Allowance for amounts owed by jointly controlled and associated entities (b) . . . .11 (215) (210) (210) (204)

14 32 - -

Total amounts payable at 30 June to:CurrentJointly controlled and associated entities - payables (a) . . . . . . . . . . . . . . . . . . . 62 21 59 13


252


Transactions involving our jointly controlled and associated entities (continued)

(b) Loans provided to jointly controlled and associated entities relates mainly to loans provided to Reach Ltd (Reach) of $210 million (2005: $204 million) and the 3GIS Partnership (3GIS) of $14 million (2005:$32 million).

Previously, the Telstra Entity and co-shareholder PCCW Limited (PCCW) bought out a loan facility owed to a banking syndicate by Reach Finance Ltd, a controlled entity of our 50% jointly controlled entity Reach. Our share of the acquisition cost of the loan was US$155.5 million, which was recognised as a receivable at the date of the transaction. During fiscal 2005, we restructured our arrangements with Reach. As a result, the terms of maturity were altered such that the facility is now an interest free loan and repayable on or after31 December 2010 upon the giving of 6 months notice by both PCCW and us. We have provided for the non-recoverability of the loan as we do not consider that Reach is in a position to be able to repay the loan amount in the medium term.

During fiscal 2005, we formed the jointly controlled entity 3GIS, together with Hutchison 3G Australia Pty Ltd (H3GA), to jointly own and operate H3GA’s existing 3G radio access network and fund future network development. We provided interest free funding to 3GIS for operational expenditure purposes. As a result, we have recognised our share of the loan outstanding by 3GIS amounting to $14 million (2005: $32 million).

Transactions involving other related entities

Post-employment benefits

As at 30 June 2006, Telstra Super owned 12,881,343 (2005: 13,280,885) shares in Telstra Corporation Limited at a cost of $56 million (2005:$67 million) and a market value of $47 million (2005: $67 million). In fiscal 2006, we paid dividends to Telstra Super of $4 million (2005:$5 million). We own 100% of the equity of Telstra Super Pty Ltd, the trustee for Telstra Super.

Telstra Super also holds bonds issued by Telstra Corporation Limited. As at 30 June 2006, Telstra Super holds bonds with a cost of $9 million (2005: $13 million) and a market value of $9 million (2005: $12 million).

All purchases and sales of Telstra shares and bonds by Telstra Super are determined by the trustee and/or its investment managers on behalf of the members of Telstra Super.

Key management personnel (KMP)

Our KMP consists of the Telstra Entity non executive directors and certain senior executives who form part of the chief executive officer’s senior leadership team. Our KMP have authority and responsibility for planning, directing and controlling the activities of the Telstra Group.

Compensation to our KMP

The compensation of each individual director and senior executive defined as a KMP including our compensation policy are discussed in note 32.

Other transactions with our KMP and their related entities

Our KMP have telecommunications services transactions with the Telstra Group, which are not significant and are both trivial and domestic in nature. The KMP related entities also have telecommunications services with us on normal commercial terms and conditions.

Our KMP are provided with telecommunications and other services and equipment to assist them in performing their duties. From time to time, we also make products and services available to our KMP without charge to enable them to familiarise themselves with our products, services and recent technological developments. To the extent it is considered that this provides a benefit to a KMP, it is included in their compensation. Refer note 32 for compensation details.



253


KMP interests in shares of Telstra Entity

During fiscal 2006, our KMP and their related entities held share capital of the Telstra Entity directly, indirectly or beneficially as follows:

Total shareholdings include shares held by our KMP and their related entities. Unless related to our employee share plans, shares acquired or disposed by our KMP during fiscal 2006 were on an arm’s length basis at market price.

(a) Shares provided to directors under directshare are subject to a restriction period. The participating directors are not able to deal in the shares until the end of the restriction period, refer to note 31 for further details.

(b) During fiscal 2006, certain directors resigned or retired from office. For these KMP, the number of shares represent those held at the date of leaving office.


Total shares held at

30 June 2005Directshare

allocation (a)

Equity instruments

exercised

Shares acquired or disposed of by

other means

Total shares held at

30 June 2006 (b)Shares that are held nominally

Number Number Number Number Number Number

DirectorsDonald G McGauchie . . . . . . . . . 41,445 16,196 - - 57,641 55,775John T Ralph (b) . . . . . . . . . . . . 105,641 - - - 105,641 104,641Solomon D Trujillo . . . . . . . . . . - - - - - -Zygmunt E Switkowski (b) . . . . . . 155,810 - - - 155,810 109,010Anthony J Clark (b) . . . . . . . . . . 83,026 - - - 83,026 73,026John E Fletcher (b). . . . . . . . . . . 52,934 9,870 - - 62,804 61,567Belinda J Hutchinson . . . . . . . . . 67,107 5,870 - 1,801 74,778 35,866Catherine B Livingstone . . . . . . . 39,734 6,104 - 10,000 55,838 44,201Charles Macek . . . . . . . . . . . . . 44,005 6,571 - - 50,576 50,576John W Stocker. . . . . . . . . . . . . 109,657 7,374 - - 117,031 114,078Peter Willcox . . . . . . . . . . . . . . 10,000 - - - 10,000 10,000John Zeglis . . . . . . . . . . . . . . . - - - - - -

709,359 51,985 - 11,801 773,145 658,740Senior executivesBruce Akhurst . . . . . . . . . . . . 62,491 - 125,900 (150,532) 37,859 32,979Kate McKenzie . . . . . . . . . . . . - - - - - -David Moffatt . . . . . . . . . . . . 3,700 - 147,300 - 151,000 3,100Deena Shiff . . . . . . . . . . . . . . 14,480 - 36,800 (36,800) 14,480 8,800John Stanhope . . . . . . . . . . . . 10,940 - 46,800 3,441 61,181 3,960David Thodey. . . . . . . . . . . . . 18,262 - 51,000 (5,000) 64,262 800Gregory Winn. . . . . . . . . . . . . - - - - - -

109,873 - 407,800 (188,891) 328,782 49,639819,232 51,985 407,800 (177,090) 1,101,927 708,379


254



KMP interests in shares of Telstra Entity (continued)

During fiscal 2005, our KMP and their related entities held share capital of the Telstra Entity directly, indirectly or beneficially as follows:

Total shareholdings include shares held by the KMP and their related entities. Unless related to our employee share plans, shares acquired or disposed by our KMP during fiscal 2005 were on an arm’s length basis at market price.

(a) Shares provided to directors under directshare are subject to a restriction period. The participating directors are not able to deal in the shares until the end of the restriction period, refer to note 31 for further details.

Total shares held at 30 June 2004

Directshare allocation (a)

Shares acquired or disposed of by other

meansTotal shares held at 30 June 2005

Shares that are held nominally

Number Number Number Number Number

DirectorsDonald G McGauchie . . . . . . . . . 34,328 7,117 - 41,445 41,445John T Ralph . . . . . . . . . . . . . . 101,943 3,698 - 105,641 104,641Zygmunt E Switkowski . . . . . . . . 155,810 - - 155,810 109,010Anthony J Clark . . . . . . . . . . . . 89,196 2,523 (8,693) 83,026 73,026John E Fletcher . . . . . . . . . . . . 48,060 4,874 - 52,934 52,934Belinda J Hutchinson . . . . . . . . . 64,948 2,159 - 67,107 29,996Catherine B Livingstone . . . . . . . 37,191 2,543 - 39,734 29,334Charles Macek . . . . . . . . . . . . . 41,462 2,543 - 44,005 44,005John W Stocker. . . . . . . . . . . . . 101,534 8,123 - 109,657 108,857

674,472 33,580 (8,693) 699,359 593,248Senior executivesBruce Akhurst . . . . . . . . . . . . 62,491 - - 62,491 54,711Douglas Campbell . . . . . . . . . . 37,200 - - 37,200 27,500David Moffatt . . . . . . . . . . . . 3,700 - - 3,700 3,100Ted Pretty . . . . . . . . . . . . . . . 2,400 - - 2,400 2,400Michael Rocca . . . . . . . . . . . . 12,000 - - 12,000 -Bill Scales . . . . . . . . . . . . . . . 9,916 - - 9,916 1,400Deena Shiff . . . . . . . . . . . . . . 14,480 - - 14,480 8,800John Stanhope . . . . . . . . . . . . 10,940 - - 10,940 3,960David Thodey. . . . . . . . . . . . . 18,262 - - 18,262 5,800

171,389 - - 171,389 107,671845,861 33,580 (8,693) 870,748 700,919


255


KMP interests in equity instruments of Telstra Entity

The following details the balances and changes in instruments issued for our KMP and their related entities during fiscal 2006.


Instrument type

Total held at 30 June

2005

Granted during the

year

Exercised during the

yearOther

changes (a)

Total held at 30 June

2006 (b)

Vested and exercisable at 30 June

2006Vested during

the year director/senior executive Number Number Number Number Number Number Number

Performance rightsSolomon D Trujillo . . . . . . . . . . . . - 836,821 - - 836,821 - -Bruce Akhurst . . . . . . . . . . . . . . . 473,600 147,240 (59,000) (66,900) 494,940 - -Kate McKenzie . . . . . . . . . . . . . . . 36,000 55,576 - - 91,576 - -David Moffatt . . . . . . . . . . . . . . . 521,600 149,750 (71,000) (76,300) 524,050 - -Deena Shiff . . . . . . . . . . . . . . . . . 151,600 100,420 (17,000) (19,800) 215,220 - -John Stanhope . . . . . . . . . . . . . . . 290,000 129,666 (23,000) (23,800) 372,866 - -David Thodey. . . . . . . . . . . . . . . . 427,200 136,068 (51,000) (59,000) 453,268 - -Restricted sharesBruce Akhurst . . . . . . . . . . . . . . . 39,000 - - (39,000) - - -David Moffatt . . . . . . . . . . . . . . . 40,000 - - (40,000) - - -Deena Shiff . . . . . . . . . . . . . . . . . 5,000 - - (5,000) - - -John Stanhope . . . . . . . . . . . . . . . 14,000 - - (14,000) - - -OptionsBruce Akhurst . . . . . . . . . . . . . . . 805,000 - - (188,000) 617,000 617,000 -David Moffatt . . . . . . . . . . . . . . . 890,000 - - (150,000) 740,000 740,000 -Deena Shiff . . . . . . . . . . . . . . . . . 202,200 - - (24,200) 178,000 178,000 -John Stanhope . . . . . . . . . . . . . . . 310,000 - - (69,000) 241,000 241,000 -David Thodey. . . . . . . . . . . . . . . . 534,000 - - - 534,000 534,000 -Incentive sharesBruce Akhurst . . . . . . . . . . . . . . . - 109,540 - 11,427 120,967 - -Kate McKenzie . . . . . . . . . . . . . . . - 17,119 - 1,786 18,905 - -David Moffatt . . . . . . . . . . . . . . . - 51,946 - 5,419 57,365 - -Deena Shiff . . . . . . . . . . . . . . . . . - 61,747 - 6,441 68,188 - -John Stanhope . . . . . . . . . . . . . . . - 50,241 - 5,241 55,482 - -David Thodey. . . . . . . . . . . . . . . . - 43,139 - 4,500 47,639 - -Deferred sharesBruce Akhurst . . . . . . . . . . . . . . . 135,300 - (66,900) - 68,400 - 66,900David Moffatt . . . . . . . . . . . . . . . 152,400 - (76,300) - 76,100 - 76,300Deena Shiff . . . . . . . . . . . . . . . . . 42,300 - (19,800) - 22,500 - 19,800John Stanhope . . . . . . . . . . . . . . . 73,200 - (23,800) - 49,400 - 23,800David Thodey. . . . . . . . . . . . . . . . 121,600 - - - 121,600 59,000 59,000TESOP97Bruce Akhurst . . . . . . . . . . . . . . . 2,500 - - - 2,500 - -John Stanhope . . . . . . . . . . . . . . . 2,500 - - - 2,500 - -TESOP99Bruce Akhurst . . . . . . . . . . . . . . . 400 - - - 400 - -Deena Shiff . . . . . . . . . . . . . . . . . 400 - - - 400 - -John Stanhope . . . . . . . . . . . . . . . 400 - - - 400 - -


256


KMP interests in equity instruments of Telstra Entity (continued)

(a) During fiscal 2006, other changes for our performance rights, restricted shares and options are a result of instruments expiring due to the specified performance hurdles not being achieved.

Other changes for incentive shares relate to additional incentive shares provided to our senior executives. Any dividends paid by the Company prior to the exercise of their incentives shares will increase the number of Telstra shares allocated to the senior executive when the vested incentive shares are exercised.

(b) For those KMP that have resigned or retired during fiscal 2006, the number of equity instruments represent those instruments held at the date of leaving office.

Equity instruments held by the former chief executive officer

Dr Switkowski ceased employment with the Company effective 1 July 2005. The number of equity instruments held by Dr Switkowski at the

date of leaving office were:

Upon ceasing employment, the deferred shares allocated to Dr Switkowski vested and became immediately exercisable, and as such were included in fiscal 2006 compensation. In addition, the TESOP97 shares were exercised during fiscal 2006.

Other equity instruments held by Dr Switkowski were not exercised. These equity instruments are subject to performance hurdles and may become exercisable during future reporting periods.


Holding as at 1 July 2005

Number

Performance rights . . . . . . . . . . . . . . . . 1,643,600Restricted shares . . . . . . . . . . . . . . . . . 96,000Options . . . . . . . . . . . . . . . . . . . . . . . 1,810,000Deferred shares . . . . . . . . . . . . . . . . . . . 500,700TESOP97 . . . . . . . . . . . . . . . . . . . . . . . 2,500TESOP99 . . . . . . . . . . . . . . . . . . . . . . . . 400


257


KMP interests in equity instruments of Telstra Entity (continued)

The following table details the balances and changes in equity instruments issued under our employee share plans for our KMP and their related entities during fiscal 2005.


Instrument typeTotal held

at 30 June 2004Granted during

the yearOther

changes (a)Total held

at 30 June 2005

Vested and exercisable at 30 June 2005

Vested during the year

director/senior executive Number Number Number Number Number NumberPerformance rightsZygmunt E Switkowski . . . . . . . . . . 1,259,400 513,200 (129,000) 1,643,600 129,000 129,000Bruce Akhurst . . . . . . . . . . . . . . . 388,600 144,000 (59,000) 473,600 59,000 59,000Douglas Campbell . . . . . . . . . . . . . 388,600 131,600 (59,000) 461,200 59,000 59,000David Moffatt . . . . . . . . . . . . . . . 446,200 146,400 (71,000) 521,600 71,000 71,000Ted Pretty . . . . . . . . . . . . . . . . . . 446,200 146,400 - 592,600 - -Michael Rocca . . . . . . . . . . . . . . . 251,200 115,000 (25,000) 341,200 25,000 25,000Bill Scales . . . . . . . . . . . . . . . . . . 210,400 106,400 (21,000) 295,800 21,000 21,000Deena Shiff . . . . . . . . . . . . . . . . . 118,600 50,000 (17,000) 151,600 17,000 17,000John Stanhope . . . . . . . . . . . . . . . 192,400 120,600 (23,000) 290,000 23,000 23,000David Thodey. . . . . . . . . . . . . . . . 345,200 133,000 (51,000) 427,200 51,000 51,000Restricted sharesZygmunt E Switkowski . . . . . . . . . . 146,000 - (50,000) 96,000 - -Bruce Akhurst . . . . . . . . . . . . . . . 60,000 - (21,000) 39,000 - -Douglas Campbell . . . . . . . . . . . . . 68,000 - (26,000) 42,000 - -David Moffatt . . . . . . . . . . . . . . . 40,000 - - 40,000 - -Ted Pretty . . . . . . . . . . . . . . . . . . 21,000 - (21,000) - - -Michael Rocca . . . . . . . . . . . . . . . 22,000 - (9,000) 13,000 - -Bill Scales . . . . . . . . . . . . . . . . . . 5,000 - - 5,000 - -Deena Shiff . . . . . . . . . . . . . . . . . 5,000 - - 5,000 - -John Stanhope . . . . . . . . . . . . . . . 25,000 - (11,000) 14,000 - -OptionsZygmunt E Switkowski . . . . . . . . . . 3,456,000 - (1,646,000) 1,810,000 1,346,000 1,346,000Bruce Akhurst . . . . . . . . . . . . . . . 1,542,000 - (737,000) 805,000 617,000 617,000Douglas Campbell . . . . . . . . . . . . . 1,597,000 - (777,000) 820,000 617,000 617,000David Moffatt . . . . . . . . . . . . . . . 1,630,000 - (740,000) 890,000 740,000 740,000Ted Pretty . . . . . . . . . . . . . . . . . . 1,722,000 - (120,000) 1,602,000 - -Michael Rocca . . . . . . . . . . . . . . . 640,000 - (315,000) 325,000 262,000 262,000Bill Scales . . . . . . . . . . . . . . . . . . 465,000 - (220,000) 245,000 220,000 220,000Deena Shiff . . . . . . . . . . . . . . . . . 380,200 - (178,000) 202,200 178,000 178,000John Stanhope . . . . . . . . . . . . . . . 616,000 - (306,000) 310,000 241,000 241,000David Thodey. . . . . . . . . . . . . . . . 1,068,000 - (534,000) 534,000 534,000 534,000Deferred SharesZygmunt E Switkowski . . . . . . . . . . 500,700 - - 500,700 - -Bruce Akhurst . . . . . . . . . . . . . . . 135,300 - - 135,300 - -Douglas Campbell . . . . . . . . . . . . . 135,300 - - 135,300 - -David Moffatt . . . . . . . . . . . . . . . 152,400 - - 152,400 - -Ted Petty . . . . . . . . . . . . . . . . . . 155,100 - - 155,100 - -Michael Rocca . . . . . . . . . . . . . . . 100,600 - - 100,600 - -Bill Scales . . . . . . . . . . . . . . . . . . 84,200 - - 84,200 - -Deena Shiff . . . . . . . . . . . . . . . . . 42,300 - - 42,300 - -John Stanhope . . . . . . . . . . . . . . . 73,200 - - 73,200 - -David Thodey. . . . . . . . . . . . . . . . 121,600 - - 121,600 - -


258


KMP interests in equity instruments issued from Growthshare (continued)

The following table details the balances and changes in equity instruments issued from Growthshare for our KMP and their related entities during fiscal 2005 (continued)

(a) Other changes have arisen in fiscal 2005 as a result of instruments lapsing due to the specified performance hurdles not being achieved.


Instrument typedirector/senior executive

Total held at 30 June 2004

Granted during the year

Other changes (a)

Total held at 30 June 2005

Vested and exercisable at 30 June 2005

Vested during the year

Number Number Number Number Number Number

TESOP97Zygmunt E Switkowski . . . . . . . . . . 2,500 - - 2,500 - -Bruce Akhurst . . . . . . . . . . . . . . . 2,500 - - 2,500 - -Douglas Campbell . . . . . . . . . . . . . 2,500 - - 2,500 - -Michael Rocca . . . . . . . . . . . . . . . 2,500 - - 2,500 - -John Stanhope . . . . . . . . . . . . . . . 2,500 - - 2,500 - -TESOP99Zygmunt E Switkowski . . . . . . . . . . 400 - - 400 - -Bruce Akhurst . . . . . . . . . . . . . . . 400 - - 400 - -Douglas Campbell . . . . . . . . . . . . . 400 - - 400 - -Deena Shiff . . . . . . . . . . . . . . . . . 400 - - 400 - -John Stanhope . . . . . . . . . . . . . . . 400 - - 400 - -


259


34. Events after balance date

We are not aware of any matter or circumstance that has occurred since 30 June 2006 that, in our opinion, has significantly affected or may significantly affect in future years:

• our operations;• the results of those operations; or• the state of our affairs;

other than:

Dividend declaration

On 10 August 2006, the directors of Telstra Corporation Limited declared a fully franked final dividend of 14 cents per ordinary share. The record date for the final dividend will be 25 August 2006 with payment being made on 22 September 2006. Shares will trade excluding the entitlement to the dividend on 21 August 2006.

A provision for dividend payable has been raised as at the date of declaration, amounting to $1,739 million. The final dividend will be fully franked at a tax rate of 30%. The financial effect of the dividend declaration was not brought to account as at 30 June 2006.

There are no income tax consequences for the Telstra Group and Telstra Entity resulting from the declaration and payment of the final ordinary dividend, except for $745 million franking debits arising from the payment of this dividend that will be adjusted in our franking account balance.

FOXTEL loan facility

On 31 July 2006, our 50% owned pay television joint venture FOXTEL entered into a new $600 million syndicated secured term loan facility to fund the refinancing of previous loan facilities (including the $550 million syndicated facility), and to enable it to meet future cash flow and expenditure requirements.

The equity contribution deed (ECD) entered into by us and FOXTEL’s other ultimate shareholders, News Corporation Limited and Publishing and Broadcasting Limited has been terminated.

Under this arrangement, recourse to our controlled entity Telstra Media Pty Ltd, as a FOXTEL partner, is limited to the assets of the FOXTEL Partnerships.


260


Financial risk factors

We undertake transactions in a range of financial instruments including:

• cash assets; • receivables; • payables; • deposits; • bills of exchange and commercial paper; • listed investments and investments in other corporations; • various forms of borrowings, including medium term notes,

commercial paper, bank loans and private placements; and• derivatives.

Our activities result in exposure to a number of financial risks, including market risk (interest rate risk, foreign currency risk and other price risk), credit risk, operational risk and liquidity risk.

Our overall risk management program seeks to mitigate these risks and reduce volatility on our financial performance. Risk management is carried out centrally by our Treasury department, which is part of our Finance and Administration business unit, under policies approved by the Board of Directors. The Board provides written principles for overall risk management, as well as written policies covering specific areas, such as foreign exchange risk, interest rate risk, credit risk, use of derivative financial instruments and non-derivative financial instruments, and the investment of excess liquidity.

We enter into derivative transactions in accordance with Board approved policies to manage our exposure to market risks and volatility of financial outcomes that arise as part of our normal business operations. These derivative instruments create an obligation or right that effectively transfers one or more of the risks associated with an underlying financial instrument, asset or obligation. Derivative instruments that we use to hedge risks such as interest rate and foreign currency movements include:

• cross currency swaps; • interest rate swaps; and• forward foreign currency contracts.

We do not speculatively trade in derivative instruments. Our derivative transactions are entered into to hedge the risks relating to underlying physical positions arising from our business activities.

Comparatives

We have elected to apply the exemption available under AASB 1: “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” (AASB 1) to apply AASB132: “Financial Instruments: Disclosure and Presentation” and AASB 139: “Financial Instruments: Recognition and Measurement” from 1 July 2005. Accordingly, we have changed our accounting policies for financial instruments from 1 July 2005. We have elected to early adopt AASB 7: “Financial Instruments: Disclosures” from 1 July 2005. AASB 7 supersedes the disclosure requirements, but not the presentation requirements of AASB 132. The early adoption of AASB 7 did not require comparative information for fiscal 2005 to be restated and disclosed.

Risks and mitigation

The risks associated with our main financial instruments and our policies for minimising these risks are detailed below.

(a) Market risk

Market risk is the risk that the fair value or future cash flows of our financial instruments will fluctuate because of changes in market prices. Components of market risk to which we are exposed are discussed below.

(i) Interest rate risk

Interest rate risk refers to the risk that the value of a financial instrument or cash flows associated with the instrument will fluctuate due to changes in market interest rates.

Interest rate risk arises from interest bearing financial assets and liabilities that we use. Non-derivative interest-bearing assets are predominantly short term liquid assets. Our interest rate liability risk arises primarily from long term foreign debt issued at fixed rates which exposes us to fair value interest rate risk. Our borrowings which have a variable interest rate attached give rise to cash flow interest rate risk.

35. Financial and capital risk management


261


(a) Market risk (continued)

(i) Interest rate risk (continued)

Our debt is sourced from a number of financial markets covering domestic and offshore, short term and long term funding. The majority of our debt consists of foreign currency denominated borrowings. We manage our debt in accordance with targeted currency, interest rate, liquidity, and debt portfolio maturity profiles. Specifically, we manage interest rate risk on our net debt portfolio by:

• controlling the proportion of fixed to variable rate positions in accordance with target levels;

• ensuring access to diverse sources of funding; • reducing risks of refinancing by establishing and managing in

accordance with target maturity profiles; and• undertaking hedging activities through the use of derivative

instruments.

We manage the interest rate exposure on our net debt portfolio to adjust the ratio of fixed interest debt to variable interest debt to our target rates, as required by our debt management policy. Where the actual interest rate profile on the physical debt profile differs substantially from our desired target, we use derivatives, principally interest rate swaps, to adjust towards the target net debt profile. Under the interest rate swaps we agree with other parties to exchange, at specified intervals (mainly quarterly), the difference between fixed contract rates and floating rate interest amounts calculated by reference to the agreed notional principal amounts.

We hedge interest rate and currency risk on most of our foreign currency borrowings by entering into cross currency principal swaps and interest rate swaps when required, which have the economic effect of converting foreign currency borrowings to Australian dollar borrowings.

The ‘Derivative financial instruments and hedging activities’ contained in this note provides further information.

The exposure to interest rate changes and the contractual repricing timeframes at 30 June 2006 on our floating rate financial instruments, which do not have offsetting risk positions, are shown in Table A below. These instruments also include cross currency swaps used to hedge our net foreign investments.

35. Financial and capital risk management (continued)

Table A

Contractual repricing datesNotional / Principal

amounts6 months or less

Telstra Group

Telstra Entity

As at 30 June 2006

As at 30 June 2006

$m $m

Floating rate instrumentsFinancial assetsCash at bank . . . . . . . . . . . . . . . . . 181 32Bills of exchange and commercial paper 451 387Cross currency swaps . . . . . . . . . . . . 511 511

Financial liabilitiesBills of exchange and commercial paper 1,457 1,457Interest rate swaps . . . . . . . . . . . . . 450 450Cross currency swaps . . . . . . . . . . . . 5,246 5,246Bank loans . . . . . . . . . . . . . . . . . . 111 110


262




Interest rates on our fixed and floating rate financial instruments which do not have offsetting risk positions are shown in Table B below. Foreign interest rate positions on our foreign cross currency and foreign interest rate swaps and on the majority of our foreign borrowings are fully offset, resulting in a nil net foreign interest position.

Accordingly, apart from some foreign borrowings and cross currency swaps which are used to hedge our net foreign investments, only the Australian interest rate positions are included in the table below.

(a) The average rate is calculated as the weighted average (based on principal/notional value) effective interest rate.

(b) The effective yield (effective interest rate) on our net debt at30 June 2006 was 6.85% for the Telstra Group and 6.51% for the Telstra Entity.

(c) Used to hedged our net foreign investments.


Table B Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Interest rate range Interest rate rangeAverage rate (a) From To

Average rate (a) From To

Note % % % % % %Australian dollar interest ratesFixed rate instrumentsFinancial liabilitiesInterest rate swaps . . . . . . . . . . . . . . . 6.47 5.60 7.66 6.47 5.60 7.66Cross currency swaps . . . . . . . . . . . . . . 6.69 6.25 7.05 6.69 6.25 7.05Telstra bonds . . . . . . . . . . . . . . . . . . . 7.21 6.48 12.60 7.21 6.48 12.60Finance lease liabilities. . . . . . . . . . . . . 9.33 7.56 10.50 7.56 7.56 7.56Deferred cash settlements . . . . . . . . . . . 12.40 12.00 12.90 - - -Floating rate instrumentsFinancial assetsCash and cash equivalents . . . . . . . . . . 5.87 5.75 5.93 5.87 5.75 5.93Cross currency swaps . . . . . . . . . . . . . . 5.89 5.89 5.89 5.89 5.89 5.89Financial liabilitiesBills of exchange and commercial paper . . 5.68 5.65 5.73 5.68 5.65 5.73Interest rate swaps . . . . . . . . . . . . . . . 6.21 5.34 7.71 6.21 5.34 7.71Cross currency swaps . . . . . . . . . . . . . . 6.67 5.88 7.49 6.67 5.88 7.49Bank loans . . . . . . . . . . . . . . . . . . . . 5.82 5.80 5.85 5.82 5.80 5.85Foreign currency interest ratesFixed rate instrumentsFinancial liabilitiesOther loans (c) . . . . . . . . . . . . . . . . . . 7.11 7.03 7.19 7.11 7.03 7.19Floating rate instrumentsFinancial liabilitiesBills of exchange and commercial paper (c) 7.48 7.44 7.54 7.48 7.44 7.54Cross currency swaps - Hong Kong dollar (c) 4.61 4.60 4.62 4.61 4.60 4.62Financial assetsCash at bank . . . . . . . . . . . . . . . . . . . 5.00 0.16 7.25 - - -


263




Sensitivity analysis

Table C shows the effect on profit and equity after tax as at 30 June 2006 if interest rates at that date had been 10 per cent higher or lower with all other variables held constant, taking into account all underlying exposures and related hedges. Concurrent movements in interest rates and parallel shifts in the yield curves is assumed.

Also included in Table C is the effect on finance costs on our floating rate instruments if interest rates had been 10 per cent higher or lower during the year.

A sensitivity of 10 per cent has been selected as this is considered reasonable given the current level of both short term and long term Australian dollar interest rates. A 10 per cent sensitivity would move short term interest rates from around 6.25% to 6.875% representing a 62.5 basis points shift. This would represent two to three rate increases which is reasonably possible in the current environment with the bias coming from the Reserve Bank of Australia and confirmed by market expectations that interest rates in Australia are more likely to move up than down in the coming period.

It should be noted that the results reflect the net impact on a hedged basis which will be primarily reflecting the Australian dollar floating or Australian dollar fixed position from the cross currency and interest rate swap hedges and therefore it is the movement in the Australian dollar interest rates which is the important assumption in this sensitivity analysis.

The impact of the sensitivity analysis on finance costs is due to two factors, the impact on interest expense being incurred on our net floating rate Australian dollar positions during the year and the ineffectiveness resulting from the change in fair value of both our derivatives and borrowings which are designated in a fair value hedge. These two factors offset each other as the ineffective component results in a gain and the increase in finance costs results in an increase in expense. The net impact on net profit is relatively small reflecting the hedge strategy adopted by Telstra in terms of repricing risk.

(ii) Foreign currency risk

Foreign currency risk refers to the risk that the value of a financial commitment, recognised asset or liability will fluctuate due to changes in foreign currency rates. Our foreign currency exchange risk arises primarily from:

• borrowings denominated in foreign currencies;• firm commitments or highly probable forecast transactions for

receipts and payments settled in foreign currencies or with prices dependent on foreign currencies; and

• net investments in foreign operations.

We are exposed to foreign exchange risk from various currency exposures, primarily with respect to:

• United States dollars;• British pounds sterling;• New Zealand dollars;• Euro; • Swiss francs;• Hong Kong dollars;• Japanese yen; • Swedish krona; and • Singapore dollar.


Table C Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Finance costs Net profit

Equity (Cash flow hedging

reserve) Finance costsProfit before income tax

Equity (Cash flow hedging

reserve$m $m $m $m $m $m

If interest rates were 10 per cent higher with all other variables held constant - increase/(decrease) . . . . . 8 (8) 29 8 (8) 29If interest rates were 10 per cent lower with all other variables held constant - increase/(decrease) . . . . . (8) 8 (29) (8) 8 (29)


264



(ii) Foreign currency risk (continued)

Our economic foreign currency risk is assessed for each individual currency and for each hedge type, calculated by aggregating the net exposure for that currency for that hedge type.

We minimise our exposure to foreign currency risk by initially seeking contracts effectively denominated in Australian dollars where possible and economically favourable to do so. Where this is not possible we manage our exposure as follows.

Foreign exchange risk that arises from firm commitments or highly probable transactions are managed principally through the use of forward foreign currency derivatives. We hedge a proportion of these transactions (such as international telecommunications traffic transactions settled in foreign currencies) in each currency in accordance with our risk management policy.

Cash flow foreign currency risk arises primarily from foreign currency overseas borrowings. We hedge this risk on the major part of our foreign currency denominated borrowings by effectively converting them to Australian dollar borrowings by entering into cross currency swaps at inception to maturity. A relatively small proportion of our foreign currency borrowings are not swapped into Australian dollars where they are used as hedges for foreign exchange exposure such as translation foreign exchange risk from our offshore business investments.

Foreign currency risk also arises on translation of the net assets of our non-Australian controlled entities which have a different functional currency. The foreign currency gains or losses arising from this risk are recorded through the foreign currency translation reserve. We manage this translation foreign exchange risk with forward foreign currency contracts, cross currency swaps and/or borrowings denominated in the currency of the entity concerned.

Where a subsidiary hedges foreign exchange transactions it designates hedging instruments with the Treasury department as fair value hedges or cash flow hedges as appropriate. External foreign exchange contracts are designated at the group level as hedges of foreign exchange risk on specific assets, liabilities or future transactions.

Also refer to ‘Derivative financial instruments and hedging activities’ contained in this note.


The following Table D shows the effect on profit and equity after tax as at 30 June 2006 from a 10 percent adverse/favourable movement in exchange rates at that date on a total portfolio basis with all other variables held constant, taking into account all underlying exposures and related hedges.

Adverse versus favourable movements are determined relative to the underlying exposure. An adverse movement in exchange rates implies an increase in our foreign currency risk exposure and a worsening of our financial position. A favourable movement in exchange rates implies a reduction in our foreign currency risk exposure and an improvement of our financial position.

A sensitivity of 10 per cent has been selected as this is considered reasonable given the current level of exchange rates and the volatility observed both on an historical basis and market expectations for future movement. Looking at the Australian dollar exchange rate against the United States dollar, the year end rate of 0.74235 would generate a 10 per cent adverse position of 0.6681 and a favourable position of 0.8166. This range is considered reasonable given the historic ranges that have been observed, for example over the last five years, the Australian dollar exchange rate against the US dollar has traded in the range 0.7985 to 0.4848.

Our foreign currency risk exposure from recognised assets and liabilities arises primarily from our long term borrowings denominated in foreign currencies. There is no significant impact on profit from foreign currency movements associated with these borrowings as they are effectively hedged.

The net gain in the cash flow hedge reserve reflects the result of exchange rate movements on the derivatives held in our cash flow hedges which will be released to the income statement in the future as the underlying hedged items affect profit.

For the Telstra Group, our foreign currency translation risk associated with our foreign investments results in some volatility to the foreign currency translation reserve. The impact on the foreign currency translation reserve relates to the hedging of our net investments in New Zealand dollars and Hong Kong dollars where the notional amount hedged equates to approximately 40%. The net loss of $211 million in the foreign currency translation reserve takes into account the related hedges and represents the impact of the unhedged portion. For the Telstra Entity there is a gain of $78 million resulting from the hedging instruments used to hedge our net foreign investments. This amount is transferred to the foreign currency translation reserve in the Telstra Group.



265



(b) Credit risk

Credit risk is the risk that a contracting entity will not complete its obligations under a financial instrument and cause us to make a financial loss. We have exposure to credit risk on all financial assets included in our balance sheet. To help manage this risk:

• we have a policy for establishing credit limits for the entities we deal with;

• we may require collateral where appropriate; and• we manage exposure to individual entities we either transact with

or enter into derivative contracts with (through a system of credit limits).

The major concentrations of credit risk for the Telstra Group and the Telstra Entity arise from our transactions in money market instruments, forward foreign currency contracts, cross currency and interest rate swaps. For credit purposes, there is only a credit risk where the contracting entity is liable to pay us in the event of a closeout. We have policies that limit the amount of credit exposure to any financial institution. Derivative counterparties and cash transactions are limited to financial institutions that meet minimum credit rating criteria in accordance with our policy requirements.

One of the methods that we use to manage the risk relating to these instruments is to monitor our exposure by country of financial institution. When reviewing concentrations of risk, we adjust for the period to maturity of relevant instruments in our portfolio to accurately consider our exposure at a point in time. On this basis, our credit risk exposure on financial assets outstanding at balance date (which includes a time based volatility allowance (VAR)) by country of financial institution is included in Table E below.

Our maximum exposure to credit risk based on the recorded amounts of our financial assets reported at 30 June 2006, net of any applicable provisions for loss, amounts to $4,889 million for the Telstra Group and $4,357 million for the Telstra Entity. For the Telstra Group this comprises current financial assets of $4,411 million (Telstra Entity: $3,839 million) and non current financial assets of $478 million (Telstra Entity: $518 million). Details of our financial assets are shown in Table G. Where entities have a right of set-off and intend to settle on a net basis under master netting arrangements, this set-off has been recognised in the financial statements on a net basis.

We do not have any other significant operating exposure to any individual contracting entity.

We may also be subject to credit risk for transactions which are not included in the balance sheet, such as when we provide a guarantee for another party. Details of our contingent liabilities and contingent assets are available at note 27.


Table D Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Equity (foreign currency

translation reserve)

Equity(cash flow

hedging reserve) Net profit

Equity (foreign currency

translation reserve)

Equity(cash flow

hedging reserve)

$m $m $m $m $mIf there was a 10% adverse movement in exchange rates with all other variables held constant - increase/(decrease) . . . . . . . . . . (211) 43 78 - 41If there was a 10% favourable movement in exchange rates with all other variables held constant - increase/(decrease) . . . . . . . . . . 211 (43) (78) - (41)

Table E Telstra Group Telstra EntityCredit risk concentrations (VAR based)

As at 30 June 2006 As at 30 June 2006% $m % $m

Australia . . . . . . . . . . 34.6 1,983 35.1 1,983United States. . . . . . . . 32.5 1,858 32.9 1,858Japan . . . . . . . . . . . . 3.9 223 3.9 223Europe . . . . . . . . . . . . 14.1 807 14.3 807United Kingdom . . . . . . 4.0 229 4.1 229Canada . . . . . . . . . . . 2.3 133 2.4 133Switzerland. . . . . . . . . 7.1 409 7.2 409Hong Kong . . . . . . . . . 1.0 59 - -New Zealand . . . . . . . . 0.5 26 0.1 9

100.0 5,727 100.0 5,651


266


(c) Liquidity risk

Liquidity risk includes the risk that, as a result of our operational liquidity requirements:

• we will not have sufficient funds to settle a transaction on the due date;

• we will be forced to sell financial assets at a value which is less than what they are worth; or

• we may be unable to settle or recover a financial asset at all.

To help reduce these risks we:

• have a liquidity policy which targets a minimum and average level of cash and cash equivalents to be maintained;

• have readily accessible standby facilities and other funding arrangements in place;

• generally use instruments that are tradeable in highly liquid markets; and

• have a liquidity portfolio structure that requires surplus funds to be invested within various bands of liquid instruments ranging from ultra liquid, highly liquid and liquid instruments.



267


(c) Liquidity risk (continued)

The contractual maturity of our fixed and floating rate financial liabilities and derivatives at 30 June 2006 are shown in Table F below.

(i) net amounts for interest rate swaps for which net cash flows are exchanged.

(ii) contractual amounts to be exchanged representing gross cash flows to be exchanged.

(iii) for floating rate instruments, the amount disclosed is determined by reference to the interest rate at the last re-pricing date.


Table F Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Contractual maturity (nominal cash flows)

Contractual maturity (nominal cash flows)

Less than1 year

1 to 2years

2 to 5 years

over 5 years

Less than 1 year

1 to 2 years

2 to 5 years

over 5 years

$m $m $m $m $m $m $m $mDerivative financial assets and liabilitiesDerivative financial liabilitiesInterest rate swaps - pay fixed (i). . . . . . . (17) (15) (16) (16) (17) (15) (16) (16)Interest rate swaps - pay variable (i). . . . . 2 (1) (7) (7) 2 (1) (7) (7)Cross currency swaps - AUD leg (fixed) (ii) . (18) (18) (54) (316) (18) (18) (54) (316)Cross currency swaps - AUD leg (variable) (ii) . . . . . . . . . . . . . . . . . . . (837) (1,648) (3,716) (3,153) (837) (1,648) (3,716) (3,153)Forward foreign currency contracts (ii) . . . (779) - - - (779) - - -Derivative financial assetsInterest rate swaps - receive fixed (i). . . . . 61 39 97 56 61 39 97 56Interest rate swaps - receive variable (i). . . 1 2 7 - 1 2 7 -Cross currency swaps - foreign leg (fixed) (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . 53 1,072 69 166 53 1,072 69 166Cross currency swaps - foreign leg (variable) (ii) . . . . . . . . . . . . . . . . . . . 647 359 3,351 2,724 647 359 3,351 2,724Forward foreign currency contracts (ii) . . . 773 - - - 773 - - -Non-derivative financial liabilitiesTelstra bonds . . . . . . . . . . . . . . . . . . . (184) (184) (1,428) (2,014) (184) (184) (1,428) (2,014)Bank loans . . . . . . . . . . . . . . . . . . . . (111) - - - (110) - - -Other loans . . . . . . . . . . . . . . . . . . . . (866) (1,813) (4,656) (4,553) (866) (1,813) (4,656) (4,553)Finance lease liabilities. . . . . . . . . . . . . (13) (12) (23) (52) (7) (6) (10) -Bills of exchange and commercial paper . . (1,490) - - - (1,490) - - -Deferred cash settlements . . . . . . . . . . . (123) (10) (29) (283) - - - -Non-derivative financial assetsBills of exchange and commercial paper . . 451 - - - 387 - - -


268


Net fair value of our financial assets and financial liabilities

The carrying amounts and fair value of our financial assets and financial liabilities is shown in Table G below:


Table G Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Carrying amount Fair value

Carrying amount Fair value

$m $m $m $m

Financial assets - currentCash at bank and on hand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238 238 87 87Bills of exchange and commercial paper . . . . . . . . . . . . . . . . . . . . . . . . 451 451 387 387Trade debtors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,421 2,421 1,771 1,771Accrued revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,027 1,027 971 971Amounts owed by controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . - - 416 416Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253 253 186 186Cross currency swap hedge receivable . . . . . . . . . . . . . . . . . . . . . . . . . 20 20 20 20Forward contract asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1 1 1

4,411 4,411 3,839 3,839

Financial assets - non currentAmounts owed by jointly controlled and associated entities . . . . . . . . . . . 14 14 - -Amounts owed by controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . - - 60 60Other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73 73 67 67Cross currency swap hedge receivable . . . . . . . . . . . . . . . . . . . . . . . . . 222 222 222 222Interest rate swap asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 169 169 169

478 478 518 518

4,889 4,889 4,357 4,357

Financial liabilities - currentTrade creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738 738 586 586Accrued interest and other accrued expenses . . . . . . . . . . . . . . . . . . . . 2,440 2,440 2,111 2,111Other creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269 269 171 171Amounts owed to controlled entities . . . . . . . . . . . . . . . . . . . . . . . . . . - - 197 197Deferred cash settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123 123 - -Loans from wholly owned controlled entities . . . . . . . . . . . . . . . . . . . . . - - 1,408 1,408Bills of exchange and commercial paper . . . . . . . . . . . . . . . . . . . . . . . . 1,457 1,481 1,457 1,481Bank loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111 111 110 110Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 394 396 394 396Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 7 5 5Cross currency swap hedge payable. . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 6 6Forward contract liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 6 6 6

5,551 5,577 6,451 6,477

Financial liabilities - non currentOther creditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70 70 65 65Deferred cash settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 127 - -Telstra bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,613 2,658 2,613 2,658Other loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,748 9,336 8,748 9,273Finance leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 48 15 15Cross currency hedge payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 612 612 612 612Interest rate swap payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156 156 156 156

12,374 13,007 12,209 12,77917,925 18,584 18,660 19,256


269


Net fair value of our financial assets and financial liabilities (continued)

(i) Unless there is evidence to suggest otherwise, financial assets and financial liabilities with a short term to maturity are considered to approximate net fair value.

(ii) The reported balance of our borrowings and derivative instruments excludes accrued interest which is recorded in current ‘trade and other receivables’ and current ‘trade and other payables’ in the balance sheet.

(iii) Derivative financial assets and derivative financial liabilities are carried at fair value. Fair value is based on the present value of the estimated future cash flows using an appropriate market based yield curve (also refer to note 2.27).

(iv) The fair value of the Telstra bonds is calculated as the present value of the estimated future cash flows using an appropriate market based yield curve (refer also to note 2.27). The carrying value of Telstra bonds is at amortised cost.

(v) Other loans comprise predominantly foreign denominated debt. The difference between the fair value and carrying value arises from the mixed measurement bases where only part of the foreign currency borrowing portfolio is carried at fair value with the remaining part at amortised cost. Fair value is based on the present value of the estimated future cash flows using an appropriate market based yield curve (also refer to note 2.27).

The carrying amount of other loans are denominated in the following

currencies:

(vi) During the year we incurred impairment losses on our financial assets of $163 million for the Telstra Group and $520 million for the Telstra Entity. For the Telstra Group impairment losses comprised $161 million on trade and other receivables and $2 million on amounts owed by associated entities. For the Telstra Entity impairment losses comprised $138 million on trade and other receivables and $382 million on amounts owed by controlled entities.


Table H Telstra Group Telstra EntityCarrying valueAs at

30 June 2006As at

30 June 2006$m $m

Australian dollar. . . . . . . . . 245 245Euro . . . . . . . . . . . . . . . . 6,336 6,336United States dollar. . . . . . . 1,028 1,028United Kingdom pound . . . . 487 487Japanese yen. . . . . . . . . . . 472 472New Zealand dollar . . . . . . . 164 164Swiss francs. . . . . . . . . . . . 326 326Singapore dollar . . . . . . . . . 84 84

9,142 9,142


270


Derivative financial instruments and hedging activities

We hold a number of different financial instruments to hedge risks relating to underlying transactions. Our major exposure to interest rate risk and foreign currency risk arises from our long term borrowings. Details of our hedging activities are provided below.

We designate certain derivatives as either:

• hedges of the fair value of recognised liabilities (fair value hedges); • hedges of foreign currency risk associated with recognised

liabilities or highly probable forecast transactions (cash flow hedges); or

• hedges of a net investment in a foreign operation (net investment hedge).

Derivatives are initially recognised at fair value on the date a derivative contract is entered into and are subsequently remeasured at their fair value.

The terms and conditions in relation to our derivative instruments are similar to the terms and conditions of the underlying hedged items. During the year we discontinued hedge accounting for our British pound borrowing in a fair value hedge. There was no material impact on our income statement. All other hedging relationships were effective at the reporting date.

For further details reference should be made to note 2.26.

(a) Fair value hedges

During the period we held cross currency principal and interest rate swaps to mitigate our exposure to changes in the fair value of foreign denominated debt from fluctuations in foreign currency and interest rates. The hedged items designated were a portion of our foreign currency denominated borrowings. The changes in the fair values of the hedged items resulting from movements in exchange rates and interest rates are offset against the changes in the value of the cross currency and interest rate swaps. The objective of this hedging is to convert foreign currency borrowings to floating Australian dollar borrowings.

Gains or losses from remeasuring the fair value of the hedge instrument are recognised within ‘finance costs’ in the income statement, together with gains and losses in relation to the hedged item where those gains or losses relate to the hedged risks. This net result largely represents ineffectiveness attributable to movements in Telstra’s borrowing margins. The remeasurement of the hedged items resulted in a loss before tax of $3 million (Telstra Entity: $3 million) and the changes in the fair value of the hedging instruments resulted in a gain before tax of $29 million (Telstra Entity: $29 million) resulting in a net gain before tax of $26 million (Telstra Entity: $26 million) recorded in ‘finance costs’ in the 2006 financial year.

The effectiveness of the hedging relationship is tested prospectively and retrospectively by means of statistical methods using a regression analysis. Regression analysis is used to analyse the relationship between the derivative instruments (the dependent variable) and the underlying borrowings (the independent variable). The primary objective is to determine if changes to the hedged item and derivative are highly correlated and, thus, supportive of the assertion that there will be a high degree of offset in fair values achieved by the hedge.

Refer to Table J and Table K for the value of our derivatives designated as fair value hedges at 30 June 2006.

(b) Cash flow hedges

Cash flow hedges are used to hedge exposures relating to our borrowings and our ongoing business activities, where we have highly probable purchase or settlement commitments in foreign currencies.

During the year, we entered into cross currency and interest rate swaps as cash flow hedges of future payments denominated in foreign currency resulting from our long-term overseas borrowings. The hedged items designated were a portion of the outflows associated with these foreign denominated borrowings. The objective of this hedging is to hedge foreign currency risks arising from spot rate changes and thereby mitigate the risk of payment fluctuations as a result of exchange rate movements.

We also entered into forward foreign currency contracts as cash flow hedges to hedge forecast transactions denominated in foreign currency which hedge foreign currency risk arising from spot rate changes. The hedged items comprised highly probable forecast foreign currency payments for operating and capital items.

The effectiveness of the hedging relationship relating to our borrowings is calculated prospectively and retrospectively by means of statistical methods using a regression analysis. The actual derivative instruments in a cash flow hedge are regressed against the hypothetical derivative. The primary objective is to determine if changes to the hedged item and derivative are highly correlated and, thus, supportive of the assertion that there will be a high degree of offset in cash flows achieved by the hedge.

The effectiveness of our hedges relating to highly probable transactions is assessed prospectively based on matching of critical terms. As both the nominal volumes and currencies of the hedged item and the hedging instrument are identical, a highly effective hedging relationship is expected. An effectiveness test is carried out retrospectively using the cumulative dollar-offset method. For this, the changes in the fair values of the hedging instrument and the hedged item attributable to exchange rate changes are calculated and a ratio is created. If this ratio is between 80 and 125 per cent, the hedge is effective.



271


Derivative financial instruments and hedging activities (continued)

(b) Cash flow hedges (continued)

The effective portion of gains or losses on remeasuring the fair value of the hedge instrument are recognised directly in equity in the cash flow hedging reserve until such time as the hedged item affects profit or loss, then the gains or losses are transferred to other revenue or other expenses in the income statement. In our hedge of forecast transactions, when the forecast transaction that is hedged results in the recognition of a non-financial asset (for example, inventory or fixed asset), the gains and losses previously deferred in equity are transferred from equity and included in the measurement of the initial cost or carrying amount of the asset. Gains or losses on any portion of the hedge determined to be ineffective are recognised immediately in the income statement within other expenses or other revenue. During the year there was no material ineffectiveness attributable to our cash flow hedges.

If a forecast transaction is no longer expected to occur, the cumulative gains or losses on the hedging instrument that were deferred in equity are transferred immediately to the income statement. During the year we did not discontinue hedge accounting for forecast transactions no longer expected to occur.

During 2006, net gains totalling $229 million after tax (Telstra Entity: $229 million) resulting from the change in the fair value of derivatives were taken directly to equity in the cash flow hedge reserve. These changes constitute the effective portion of the hedging relationship. Net gains amounting to $294 million after tax (Telstra Entity: $295 million) recognised in the cash flow hedge reserve were transferred to the income statement during the year.

Refer to Table J, Table K and Table L for the value of our derivatives designated as cash flow hedges at 30 June 2006.

The following table shows the maturities of the payments, that is when the cash flows are expected to occur.

(i) These amounts will affect our income statement in the same time period as the cash flows are expected to occur except for purchases of fixed assets in which case the gains and losses on the associated hedging instruments are included in the measurement of the initial cost of the asset. The hedged asset purchases affect profit as the assets are depreciated over their useful lives. Included in the forecast purchases of $757 million (Telstra Entity: $734 million) are $593 million of fixed asset purchases (Telstra Entity: $593 million).

(ii) The impact on our income statement from foreign currency translation movements associated with these hedged borrowings is expected to be nil as these borrowings are effectively hedged.

(c) Hedges of net investments in foreign operations

We have exposure to foreign currency risk as a result of our investments in offshore activities, including our investments in TelstraClear Limited and Hong Kong CSL Limited (CSL). This risk is created by the translation of the net assets of these entities from their functional currency to Australian dollars. We hedge our investments in foreign operations to mitigate exposure to this risk using forward foreign currency contracts, cross currency swaps and/or borrowings in the relevant currency of the investment.

The effectiveness of the hedging relationship is tested using prospective and retrospective effectiveness tests. In a retrospective effectiveness test, the changes in the fair value of the hedging instruments and the change in the value of the hedged net investment from spot rate changes are calculated and a ratio is created. If this ratio is between 80 and 125 per cent, the hedge is effective. The prospective effectiveness test is performed based on matching of critical terms. As both the nominal volumes and currencies of the hedged item and the hedging instrument are identical, a highly effective hedging relationship is expected.


Table I Telstra Group Telstra EntityNominal cash outflows

As at30 June 2006

As at30 June 2006

$m $m

Highly probable forecast purchases (i)- less than one year . . . . . . . . . . (757) (734)

Borrowings (ii)- less than one year . . . . . . . . . . . (431) (431)- one to five years . . . . . . . . . . . . (2,924) (2,924)- greater than five years . . . . . . . . (1,978) (1,978)

(5,333) (5,333)


272



(c) Hedges of net investments in foreign operations (continued)

Gains or losses on remeasurement of our derivative instruments designated as hedges of foreign investments are recognised in the foreign currency translation reserve in equity to the extent they are effective. The cumulative amount of the recognised gains or losses included in equity are transferred to the income statement when the foreign operation is sold.

Gains or losses on any portion of the hedge determined to be ineffective are recognised in the income statement within other expenses or other revenue. During the year there was no material ineffectiveness attributable to our net investment hedges.

During the year net gains of $50 million on our hedging instruments were taken directly to equity in the foreign currency translation reserve in the consolidated balance sheet.

Refer to Table J and Table L for the value of our derivatives designated as hedges of net foreign investments at 30 June 2006.

In addition, included in the carrying value of ‘other loans’ and ‘bills of exchange and commercial paper’ at 30 June 2006 are New Zealand dollar denominated borrowings of $164 million (fair value: $164 million) and New Zealand dollar denominated commercial paper of $334 million (fair value: $334 million). These were designated as a hedging instrument of our net investment in TelstraClear. The loans are included within non current financial liabilities and the commercial paper is included within current financial liabilities of the Telstra Group and the Telstra Entity. A foreign exchange gain of $58 million on translation of these borrowings and commercial paper to Australian dollars was recognised in equity in the foreign currency translation reserve in the consolidated balance sheet.



273



(d) Hedging instruments

Derivative hedging instruments

Details of our derivative hedging instruments as at balance date are shown in Table J, Table K and Table L below. The fair value of a hedging derivative is classified as a non-current asset or liability if the remaining maturity of the hedged item is more than 12 months, and as a current asset or liability if the remaining maturity of the hedged item is less than 12 months.

(i) Gains or losses recognised in the cash flow hedging reserve in equity (refer note 22) on cross currency swap contracts as at 30 June 2006 will be continuously released to the income statement until the underlying borrowings are repaid.

(ii) Gains or losses recognised in the cash flow hedging reserve in equity (refer to note 22) on interest rate swap contracts as at 30 June 2006 will be continuously released to the income statement until the underlying borrowings are repaid.


Table J Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Assets Liabilities Assets Liabilities$m $m $m $m

Cross currency swapsCurrentCross currency swaps - designated cash flow hedges of other loans (i) . . . 11 - 11 -Cross currency swaps - designated fair value hedges of other loans . . . . . 9 - 9 -Cross currency swaps - designated hedge of net foreign investment . . . . . - 6 - 6Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 6 20 6Non currentCross currency swaps - designated cash flow hedges of other loans (i) . . . 53 350 53 350Cross currency swaps - designated fair value hedges of other loans . . . . . 169 259 169 259Cross currency swaps - designated hedge of net foreign investment . . . . . - 3 - 3Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222 612 222 612

Table K Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Assets Liabilities Assets Liabilities$m $m $m $m

Interest rate swapsNon currentInterest rate swaps - designated cash flow hedges of other loans (ii) . . . . 106 107 106 107Interest swaps - designated fair value hedges of other loans . . . . . . . . . 63 49 63 49Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169 156 169 156


274



(d) Hedging instruments (continued)

Derivative hedging instruments (continued)

The fair value of our net Australian dollar amounts receivable/(payable), settlement dates and average contractual forward exchange rates are as follows:

(i) Gains or losses recognised in the cash flow hedging reserve in equity (refer to note 22) on forward foreign exchange contracts as at 30 June 2006 will be released to the income statement at dates when the cash flow from the underlying forecast transactions will occur. However, where the underlying forecast transaction is a purchase of a non-financial asset (for example, inventory or a fixed asset) the gain or loss in the cash flow hedging reserve will be transferred and included in the measurement of the initial cost of the asset at the date the asset is recognised.

(ii) Other forward exchange contracts which are not included in the above designated hedging relationships have been entered into to hedge exposure of other payables and receivables recognised in the balance sheet. These balances are not significant.


Table L Telstra Group Telstra EntityAs at 30 June 2006 As at 30 June 2006

Assets Liabilities Assets Liabilities

$m $m $m $m

Forward foreign currency contractsUnited States (US) dollars - designated as cash flow hedges: highly probable purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - less than 3 months, at contractual forward exchange rates averaging United States dollars 0.7328 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2 - 2- 3 to 12 months, at contractual forward exchange rates averaging United States dollars 0.7347 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2 - 2

- 4 - 4

New Zealand (NZ) dollars - designated as hedge: net foreign investment - 3 than 12 months, at contractual forward exchange rates averaging New Zealand dollars 1.1946 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - 2 - 2

Hong Kong (HK) dollars - designated as hedge: net foreign investment- 3 to 12 months, at contractual forward exchange rates averaging Hong Kong dollars 5.7248 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 - 1 -

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 6 1 6


275



Breaches

During the year we have not breached any of our agreements with our lenders.

Capital Risk Management

Our objectives when managing capital are to safeguard the Group’s ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, we may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares.

We monitor capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including ‘borrowings’ and ‘derivative financial instruments’ as shown in the consolidated balance sheet) less cash and cash equivalents. Total capital is calculated as equity as shown in the consolidated balance sheet plus net debt.

During 2006, our strategy was to maintain the net debt gearing ratio within 55 to 75 per cent, in order to secure access to finance at a reasonable cost.

The gearing ratios at 30 June 2006 were as follows:


Telstra Group Telstra EntityAs at

30 June 2006As at

30 June 2006$m $m

Total borrowings. . . . . . . . . . . 13,746 14,642less cash and cash equivalents . . (689) (474)Net debt . . . . . . . . . . . . . . . . 13,057 14,168Total equity . . . . . . . . . . . . . . 12,832 12,115Total capital . . . . . . . . . . . . . 25,889 26,283Gearing ratio . . . . . . . . . . . . . 50.4% 53.9%


276


We are required by the Corporations Act 2001 to prepare our financial reports for financial years commencing on or after 1 January 2005 under the Australian equivalents of International Financial Reporting Standards (A-IFRS) as adopted by the Australian Accounting Standards Board (AASB). We implemented accounting policies in accordance with A-IFRS on 1 July 2004, except for those relating to financial instruments, which were implemented on 1 July 2005.

The transitional rules for first time adoption of A-IFRS required that we restate our comparative financial report using A-IFRS, except for AASB 132: “Financial Instruments: Disclosure and Presentation” and AASB 139: “Financial Instruments: Recognition and Measurement”, where comparative information was not required to be restated. In addition, we have elected to early adopt AASB 7: “Financial Instruments: Disclosures”, which supersedes the disclosure requirements of AASB 132.

Comparatives were remeasured and restated for the year ended30 June 2005. Most of the adjustments on transition were required to be made to opening retained profits at the beginning of the first comparative period (i.e. at 1 July 2004).

Amendments to A-IFRS transition adjustments disclosed at 31 December 2005

We have made certain amendments to the impacts of adoptingA-IFRS on the Telstra Group disclosed at 31 December 2005.These amendments are set out below.

(i) 3G spectrum licence

Under previous Australian Generally Accepted Accounting Principles (AGAAP) we expensed the annual payments made under our Hong Kong 3G spectrum licence as incurred, except for those incurred during the construction of our 3G network in Hong Kong which were capitalised as part of the asset cost.

Based on the IFRS interpretation adopted by other 3G mobile operators in Hong Kong, on transition we have recorded an intangible asset of $121 million (30 June 2005: $108 million) associated with our Hong Kong 3G spectrum licence. This includes $25 million (30 June 2005: $24 million) previously capitalised under AGAAP as part of property, plant and equipment. A corresponding accrual liability has also been recorded.

This intangible asset is amortised over the term of the licence agreement. Net profit before tax has increased by $4 million for the year ended 30 June 2005 due to this additional amortisation and the unwinding of the present value discount on the accrual, partially offset by the elimination of the licence expense. For further details refer to note 36(k).

The recognition of this spectrum licence has resulted in a reduction in the deferred tax liability of the Telstra Group as at 1 July 2004 of $21 million (30 June 2005: $19 million).

(ii) Determination of tax bases

The tax base of our defined benefit asset changed as a result of an interpretation on the treatment of the contribution tax adjustment made to the carrying value of the asset. As a result there was an increase to the deferred tax liability associated with the defined benefit asset on transition of $24 million (30 June 2005: $11 million).

In addition, we reduced the deferred tax asset of one of our controlled entities due to the reassessment of the tax base of certain items of property, plant and equipment on transition by $28 million (30 June 2005: $29 million).

For further details refer to note 36(c).

(iii) Operating leases

Under A-IFRS operating lease rental expense is recognised on a straight line basis over the term of the lease, even if the payments are not on that basis. Under previous AGAAP operating lease rentals were expensed as incurred. This has resulted in the recognition of an additional non-current liability on transition to A-IFRS of $37 million (30 June 2005: $48 million). Operating lease expense increased by $11 million for the year ended 30 June 2005. Refer to note 36(e) for further details.

A-IFRS adjustments with effect from 1 July 2004

(a) AASB 2: "Share-Based Payment" (AASB 2)

Under previous AGAAP we recognised an expense for all restricted shares, performance rights, deferred shares and Telstra shares (consisting of “directshares” and “ownshares”) issued. This expense was equal to the funding provided to the Telstra Growthshare Trust (Growthshare) to purchase Telstra shares on market to underpin these equity instruments, and was recognised in full in the income statement when the funding was provided. Under previous AGAAP, we did not recognise an expense for options issued on the basis that instrument holders are required to pay the option exercise price once the options vest and are exercised.

Under AASB 2, we recognise an expense for all share-based remuneration. This expense is based on the fair value of the equity instruments issued, determined at the grant date. The fair value is calculated using an appropriate valuation technique to estimate the price of those equity instruments in an arm’s length transaction between knowledgeable, willing parties. The fair value calculated is charged against profit over the relevant vesting period, adjusted to reflect actual and expected levels of vesting.

36. Adoption of International Financial Reporting Standards


277


36. Adoption of International Financial Reporting Standards (continued)

A-IFRS adjustments with effect from 1 July 2004 (continued)

(a) AASB 2: “Share-Based Payment” (AASB 2) (continued)

Under the transitional exemptions of AASB 1: “First-time Adoption of Australian Equivalents to International Financial Reporting Standards” (AASB 1), we elected not to apply AASB 2 to equity instruments granted prior to 7 November 2002.

This approach gave rise to a net positive transitional adjustment to retained profits. If we had not made this election, resulting in all equity instruments granted prior to 7 November 2002 being subject to AASB 2, then opening retained profits on transition would decrease, with a corresponding increase in share capital.

Furthermore, there would have been an increase in labour expense for the year ended 30 June 2005. Equity instruments granted prior to7 November 2002, for which we have elected not to apply AASB 2, include those granted under Telstra Employee Share Ownership Plan Trust (TESOP97) and Telstra Employee Share Ownership Plan Trust II (TESOP99), as well as certain Growthshare issues.

We own 100% of the equity of Telstra Growthshare Pty Ltd and the Telstra ESOP Trustee Pty Ltd, the corporate trustees for the Telstra Growthshare Trust (Growthshare), TESOP97 and TESOP99, which administer our share-based payment plans. Under previous AGAAP we did not control or significantly influence these trusts, as beneficial ownership and control remained with the employees who participate in the share plans, administered by the Trustee on their behalf.

Under A-IFRS, we have included the results, position and cash flows of Growthshare, TESOP97 and TESOP99 within our financial statements.

(i) On transition as at 1 July 2004

To record the initial recognition of Growthshare within the Telstra Group and Telstra Entity, the loan receivable from Growthshare was eliminated ($65 million), share capital reduced to reflect the shares held by Growthshare in the Telstra Entity ($117 million), and the cash held by Growthshare was recognised ($3 million).

Other assets and liabilities held by the trusts were considered insignificant to Telstra Group and Telstra Entity.

Shares issued under TESOP97 and TESOP99, in conjunction with the non-recourse loans, have been accounted for as options. As a result, the outstanding balance of the loans to employees under TESOP97 and TESOP99 amounting to $174 million (comprising $24 million current receivables and $150 million non current receivables), was deducted from share capital of the Telstra Group and Telstra Entity on transition to A-IFRS.

A transitional adjustment to increase Telstra Group and Telstra Entity opening retained profits by $55 million represents the reversal of the expense previously recorded under AGAAP. We also recognised a transitional expense in retained profits under AASB 2 of $4 million relating to the amortisation over the vesting period of equity instruments issued subsequent to 7 November 2002. This transitional expense increased share capital by $4 million.

(ii) At 30 June 2005

The cumulative effect on the Telstra Group and Telstra Entity at30 June 2005 was to increase cash assets by $8 million, decrease current receivables by $24 million, non current receivables by$175 million, and share capital by $257 million. Labour expense decreased by $10 million, finance income decreased by $2 million, and dividends decreased by $7 million for the year ended 30 June 2005.

(b) AASB 3: “Business Combinations” (AASB 3)

We previously amortised goodwill over the period of expected benefit, not exceeding 20 years. Under A-IFRS goodwill acquired in a business combination is not amortised, but instead is subject to impairment testing at each reporting date, or upon the occurrence of triggers that may indicate a potential impairment. If there is an indication of impairment resulting in an impairment loss, it is recognised immediately in the income statement.

Under the transitional arrangements of AASB 1 we had the option of applying AASB 3 prospectively from the transition date to A-IFRS (from 1 July 2004). We chose this option rather than to restate all previous business combinations. If this election had not been made, there would not have been a significant impact on the balance sheet or income statement because our accounting for significant business combinations under previous AGAAP was consistent with A-IFRS and USGAAP, whereby we recognised all identifiable assets and liabilities upon acquisition, including intangible assets.

The impact of AASB 3 and associated transitional arrangements is as follows:

• all prior business combination accounting was frozen as at 1 July 2004; and

• the value of goodwill was frozen as at transition date, with any amortisation that was reported under previous AGAAP subsequent to transition date was reversed for A-IFRS restatements.


There were no adjustments on transition as a result of AASB 3.


278




(b) AASB 3: “Business Combinations” (AASB 3) (continued)


The effect on the Telstra Group at 30 June 2005 of the cessation of amortisation of goodwill was to increase goodwill and decrease amortisation expense by $145 million (Telstra Entity: $4 million). Investments accounted for using the equity method increased by$2 million for the Telstra Group, with a corresponding decrease in share of net loss from jointly controlled and associated entities.

(c) AASB 112: “Income Taxes” (AASB 112)

On transition to A-IFRS, a new method of accounting for income taxes, known as the “balance sheet approach”, was adopted, replacing the “income statement approach” required by previous AGAAP. Under the new method we generally recognise deferred tax balances in the balance sheet when there is a difference between the carrying value of an asset or liability and its tax base.

The adoption of the “balance sheet approach” has resulted in a number of additional deferred tax balances being recognised, as well as adjustments to existing deferred tax balances. Furthermore, additional deferred tax liabilities have been recognised associated with fair value adjustments on entities acquired by us. Where the acquisition has occurred after 1 July 2004 a corresponding adjustment has been made to goodwill in accordance with AASB 3.

The Telstra Entity has formed a tax consolidated group with its Australian resident wholly owned subsidiaries. Under previous AGAAP the Telstra Entity, as head entity of the tax consolidated group, recognised tax balances for all entities in the group.

Under A-IFRS and in accordance with UIG 1052 “Tax Consolidation Accounting” (UIG 1052), the Telstra Entity only accounts for its own tax balances, with the exception of the following:

• the current tax liability for the tax consolidated group; and• the current and deferred tax arising from unused tax losses and tax

credits for all entities in the tax consolidated group.

Under UIG 1052, the current tax liability of the tax consolidated group is required to be allocated to each of the entities in the group. As there was no tax funding arrangement in place at 30 June 2005, this allocation was recorded as a contribution by or distribution to the Telstra Entity.


The Telstra Group and Telstra Entity’s deferred tax liabilities decreased as a result of the transition to other A-IFRS standards.The transition adjustment comprised:

A corresponding increase in opening retained profits was recorded as a result of these adjustments.

In addition, there was a transitional adjustment to deferred tax liabilities as a result of the change in accounting for income taxesto the balance sheet approach, and the adoption of UIG 1052.This adjustment consisted of:

For the Telstra Group opening retained profits decreased by $6 million (Telstra Entity: $142 million), and the asset revaluation reserve reduced by $32 million (Telstra Entity: $83 million) as a result of these entries. Furthermore, the balance of investments recorded by the Telstra Entity increased by $77 million.

Telstra Group

Telstra Entity

Note $m $m

Operating leases. . . . . . . . . . . . . . . 36 (e) (11) (11)Defined benefit asset . . . . . . . . . . . . .36 (f) 159 158Borrowing costs . . . . . . . . . . . . . . . 36 (h) (129) (129)3G spectrum licence. . . . . . . . . . . . . .36 (k) (21) -Handset subsidies . . . . . . . . . . . . . . .36 (k) (72) (72)Net decrease in deferred tax liabilities . . . . . (74) (54)

Telstra Group

Telstra Entity

$m $m

Tax base differences on buildings . . . . . . . . 77 77Tax effect of fair value adjustments on entities acquired by us . . . . . . . . . . . . . . . . . . . . 66 -Adoption of UIG 1052 . . . . . . . . . . . . . . . . - 329Adjustments to plant and equipment and other temporary differences . . . . . . . . . . . (105) (104)Net increase in deferred tax liabilities. . . . . . 38 302


279




(c) AASB 112: “Income Taxes” (AASB 112) (continued)


The Telstra Group and Telstra Entity’s deferred tax liabilities decreased as a result of the impact of other A-IFRS standards as at30 June 2005. This adjustment consisted of:

The Telstra Group and Telstra Entity retained profits increased by$24 million due to the tax effect of the defined benefit actuarial loss. Telstra Group tax expense for the year ended 30 June 2005 decreased by $84 million (Telstra Entity: $77 million).

In addition, an adjustment to deferred tax liabilities was attributable to the change in accounting for income taxes to the balance sheet approach and the adoption of UIG 1052. This adjustment consisted of:

As a result of adjustments associated with the change to the balance sheet approach, Telstra Group goodwill increased by $63 million and the FCTR increased by $9 million as at 30 June 2005. Income tax expense for the Telstra Group for the year ended 30 June 2005 increased by $8 million.

For the Telstra Entity, investments increased by $107 million as at 30 June 2005. Dividend revenue increased by $223 million and income tax expense increased by $182 million for the year ended 30 June 2005.

(d) AASB 116: “Property, Plant and Equipment” (AASB 116)

Under the transitional exemptions of AASB 1 we had the option to use an asset’s fair value, or previously revalued amount, as its deemed cost from the date of transition. We elected to apply the cost model under AASB 116, and therefore the carrying value of our property, plant and equipment (some of which had been previously revalued) and intangible assets on the date of transition were deemed to be cost under A-IFRS. If this election had not been made, we would have had to restate these assets to their original historical cost.

On transition to A-IFRS an entity is required to derecognise items where A-IFRS does not permit such recognition. As we have adopted the cost model under AASB 116, the asset revaluation reserve will be derecognised as it is not a valid reserve under the cost model. The balance, after taking into consideration other A-IFRS adjustments, has been transferred to the general reserve.

Under previous AGAAP, we recognised the gross proceeds on sale of non current assets as revenue and the cost in other expenses. A-IFRS requires the net gain on sale of non current assets to be classified as other income, not separately treated as revenue and other expenses.


For the Telstra Entity, the balance of the asset revaluation reserve of $194 million was transferred to the general reserve on transition toA-IFRS.


On 6 December 2004, we acquired a 50% interest in the 3G Radio Access Network (RAN) assets of Hutchison 3G Australia Pty Ltd (H3GA) for $450 million, payable over 2 years. Due to the deferred payment terms, under previous AGAAP our property, plant and equipment balance increased by $428 million, representing the present value of the purchase price calculated using our incremental borrowing rate. AASB 116 requires that a discount rate specific to the asset be used, rather than our incremental borrowing rate.

Under previous AGAAP, the release of interest associated with the unwinding of the present value discount was capitalised as part of property, plant and equipment until the assets were installed ready for use. Under A-IFRS the release of interest associated with the unwinding of the present value discount was expensed as incurred.

For the Telstra Group, the change in the discount rate and the cessation of interest capitalisation resulted in a decrease in our property, plant and equipment of $37 million, and a decrease in current and non current payables of $10 million (comprising $3 million current and $7 million non current). Finance costs of the Telstra Group for the year ended 30 June 2005 increased by $27 million.

Telstra Group

Telstra Entity

Note $m $m

Deferred payment for equipment . . . . 36 (d) (8) -Operating leases . . . . . . . . . . . . . . . 36 (e) (14) (14)Defined benefit asset . . . . . . . . . . . . .36 (f) 79 79Borrowing costs . . . . . . . . . . . . . . . 36 (h) (129) (129)3G spectrum licence. . . . . . . . . . . . . 36 (k) (19) -Handset subsidies . . . . . . . . . . . . . . 36 (k) (91) (91)Net decrease in deferred tax liabilities . . . . . (182) (155)

Telstra Group

Telstra Entity

$m $m

Tax base differences on buildings . . . . . . 74 74Tax effect of fair value adjustments on entities acquired by us . . . . . . . . . . . . . 104 -Adoption of UIG 1052 . . . . . . . . . . . . . . - 299Adjustments to plant and equipment and other temporary differences . . . . . . . . . (77) (83)Net increase in deferred tax liabilities. . . . 101 290


280




(d) AASB 116: “Property, Plant and Equipment” (AASB 116) (continued)

For the Telstra Group we have reclassified revenue of $476 million (Telstra Entity: $336 million) and other expenses of $215 million (Telstra Entity: $203 million) to other income associated with the net gain on sale of non current assets for the year ended 30 June 2005.

(e) AASB 117: “Leases” (AASB 117)

Under previous AGAAP, operating lease payments were expensed in the periods in which they were incurred. Under A-IFRS, operating lease payments are expensed on a straight line basis over the term of the lease, even if the payments are not on that basis. Where the lease contains a fixed rental increase each year, the total impact of the rental increase is expensed evenly over the lease term.


For the Telstra Group and Telstra Entity, non-current trade and other payables increased by $37 million, representing an increase to previously recognised operating lease expense associated with using the straight line method for A-IFRS, with a corresponding decrease in opening retained profits.


For the Telstra Group and Telstra Entity, non-current trade and other payables increased by $48 million. For the year ended 30 June 2005, operating lease expense increased by $11 million.

(f) AASB 119: “Employee Benefits” (AASB 119)

Under previous AGAAP, we did not recognise an asset or liability on our balance sheet for the net position of the defined benefit plans we sponsor in Australia and Hong Kong.

On adoption of A-IFRS, we recognised the net position of each plan as a transitional adjustment to the balance sheet, with a corresponding entry to retained profits. The transitional adjustment was based on an actuarial valuation of each scheme at transition date determined in accordance with AASB 119.

A revised AASB 119 was issued in December 2004 and applies to annual reporting periods beginning on or after 1 January 2006. We have elected under s.334(5) of the Corporations Act 2001 to early adopt this revised accounting standard for the financial year commencing 1 July 2004.

This revised standard is similar to the current accounting standard, with the exception of the treatment of actuarial gains and losses. This revised standard enables us to either:

• recognise actuarial gains and losses directly in the income statement;

• recognise actuarial gains and losses in the income statement using the “corridor approach”; or

• recognise actuarial gains and losses directly in retained profits.

Under this revised standard, we have elected to recognise actuarial gains and losses directly in retained profits. The actuarial gains and losses are based on an actuarial valuation of each plan at reporting date. Other components of pension costs are recognised in the income statement as a labour expense. Where appropriate, this additional labour cost is capitalised as part of our constructed plant and equipment.


The Telstra Group adjustment on transition resulted in the recognition of a defined benefit asset of $537 million (Telstra Entity: $529 million), with a corresponding increase in opening retained profits.


The cumulative effect on the Telstra Group balance sheet at 30 June 2005 was to recognise a defined benefit asset of $247 million, increase property, plant and equipment by $24 million and decrease retained profits for actuarial losses by $90 million. Telstra Group labour expense increased by $175 million and depreciation expense increased by $1 million for the year ended 30 June 2005

The cumulative effect on the Telstra Entity balance sheet at 30 June 2005 was to recognise a defined benefit asset of $242 million, increase property, plant and equipment by $24 million and decrease retained profits for actuarial losses by $85 million. Telstra Group labour expense increased by $176 million and depreciation expense increased by $1 million for the year ended 30 June 2005.

(g) AASB 121: “The Effects of Changes in Foreign Exchange Rates” (AASB 121)

AASB 121 requires goodwill and fair value adjustments arising on the acquisition of a foreign controlled entity to be expressed in the functional currency of the foreign operation. Previously, we fixed goodwill and certain fair value adjustments in Australian dollars based on the exchange rate at the acquisition date.


281




(g) AASB 121: “The Effects of Changes in Foreign Exchange Rates” (AASB 121) (continued)

Under the transitional rules of AASB 1 we have taken advantage of an exemption that permits application of AASB 121 retrospectively to goodwill and fair value adjustments arising in all business combinations that occurred before the date of transition to A-IFRS. This exemption allows us to reset the goodwill and fair value adjustments to the functional currency of the foreign operations at the original date of acquisition. This adjustment is primarily attributable to our investments in the Telstra CSL Group (HKCSL) and TelstraClear Limited (TelstraClear).

Under AASB 1 we have also applied an exemption that permitted the resetting of the FCTR to nil as at the date of transition to A-IFRS.


The Telstra Group transitional adjustments to reset goodwill and fair value adjustments of foreign controlled entities resulted in a decrease to the FCTR of $297 million, corresponding with an increase to property, plant and equipment of $3 million, an increase of $14 million to intangible assets and a decrease in goodwill of $314 million. The A-IFRS FCTR following these and other A-IFRS adjustments was $343 million. This FCTR balance was reset to nil with a corresponding decrease to opening retained profits.


The cumulative effect on the Telstra Group balance sheet at 30 June 2005 was to decrease goodwill by $454 million, increase other intangibles by $9 million, increase property, plant and equipment by $2 million and decrease FCTR by $111 million. The impact on the income statement for the year ended 30 June 2005 was a decrease in other expenses of $11 million representing a change in the functional currency of a foreign controlled entity.

(h) AASB 123: “Borrowing Costs”

In accordance with previous AGAAP, we previously capitalised borrowing costs incurred in respect of internally constructed property, plant and equipment and software assets that met the criteria for qualifying assets. The benchmark treatment required under A-IFRS is to expense borrowing costs. AASB 123 does however permit the alternative treatment of capitalising these costs where they relate to qualifying assets. We have elected to change our policy in line with the benchmark treatment and expense our borrowing costs.


We transferred the unamortised balance of capitalised borrowing costs included in property, plant and equipment and software assets to retained profits. This gave rise to a reduction in Telstra Group property, plant and equipment of $399 million (Telstra Entity:$367 million) and a reduction in software assets of $63 million (Telstra Entity: $63 million), with a corresponding decrease in opening retained profits.


For the Telstra Group the effect on the balance sheet at 30 June 2005 was to decrease property, plant and equipment by $401 million (Telstra Entity: $374 million) and reduce software assets by$57 million (Telstra Entity: $57 million). Telstra Group depreciation expense decreased by $94 million (Telstra Entity: $90 million) and finance costs increased by $90 million (Telstra Entity: $90 million) for the year ended 30 June 2005.

(i) AASB 128: “Investments in Associates” (AASB 128) and AASB 131: “Interests in Joint Ventures” (AASB 131)

AASB 128/131 requires amounts that are in substance part of the net investment in associates or jointly controlled entities to be accounted for as part of the carrying value of the investment for the purposes of equity accounting the results of the associate or jointly controlled entity. Accordingly, we have reclassified amounts that are not currently recorded in the carrying value of our investment in associates or jointly controlled entities to be treated as an extension of our equity investment. This treatment gave rise to the continuation of equity accounting of our share of the operating losses in respect of those associates and jointly controlled entities that are incurring losses and have balances as described above.


On transition to AASB 128/131, there was a decrease to Telstra Group non current receivables of $208 million representing the capacity prepayment with our joint venture entity Reach Ltd (Reach). This non current asset was deemed to be an extension of our investment in Reach under A-IFRS and was absorbed by the carried forward losses in Reach not previously recognised. The impact of this change on the Telstra Group was to decrease opening retained profits by $348 million for our share of the accumulated losses, offset by an increase of $140 million to the FCTR for the translation differences on our investment in Reach. The FCTR attributable to Reach was reset to nil as detailed in the adjustment outlined in note 36(g).


282




(i) AASB 128: “Investments in Associates” (AASB 128) and AASB 131: “Interests in Joint Ventures” (AASB 131) (continued)


On 16 April 2005 we swapped our capacity prepayment with Reach for an Indefeasible Right of Use (IRU). This IRU was recorded as a deferred expense under previous AGAAP and was being amortised over the term of the IRU being 15 years. As part of this arrangement, we agreed to fund Reach’s committed capital expenditure together with our co-shareholder PCCW Limited for the period until 2022, up to a value of US$106 million each, if required. Our share was disclosed as a contingent liability under previous AGAAP.

Under A-IFRS, the IRU was deemed to be an extension of our investment in Reach, similar to the capacity prepayment. Furthermore, our commitment to Reach for the committed capital expenditure required us to recognise additional equity accounted losses in Reach of $102 million for the year ended 30 June 2005.This gave rise to a provision of $90 million ($32 million current and$58 million non current) as at 30 June 2005 for the net present value of our share of the committed capital expenditure. Other assets - current decreased by $1 million, intangibles decreased by $217 million and trade and other payables decreased by $1 million. For the year ended 30 June 2005, finance costs increased by $2 million associated with the unwinding of the present value discount, amortisation expense decreased by $3 million, finance income decreased by $18 million and exchange losses decreased by $20 million.

The effect on the Telstra Entity for our commitment to Reach for the committed capital expenditure was to recognise a provision of $90 million ($32 million current and $58 million non current) as at 30 June 2005. Other current assets decreased by $1 million, intangible assets increased by $87 million and trade and other payables decrease by$1 million. For the year ended 30 June 2005, finance costs increased by $2 million and amortisation expense increased by $1 million.

Investments accounted for using the equity method decreased by$3 million as a result of the adoption of A-IFRS by our jointly controlled and associated entities. For the year ended 30 June 2005, our share of equity accounted losses increased by $3 million.

(j) AASB 136: “Impairment of Assets” (AASB 136)

Our accounting policy under previous AGAAP was to assess our current and non current assets for impairment by determining the recoverable amount of those assets. We wrote down the value of the non current asset where the carrying amount exceeded recoverable amount. We assessed recoverable amount for a group of non current assets where those assets were considered to work together as one.

With the adoption of AASB 136, impairment of assets is assessed on the basis of individual cash generating units. We have assessed our Australian telecommunications network to be a single cash generating unit for the purpose of this standard with the exception of the HFC network. This approach has been adopted as we consider that, in the generation of our revenue streams, the delivery of our end products or services is heavily reliant on the use of one core of commonly shared communication assets, encompassing the customer access network and the core network. This ubiquitous network carries all our telecommunications traffic throughout Australia.

Under previous AGAAP, we assessed recoverable amount on this same ubiquitous network basis, and as a result, there were no initial adjustments to the value of our network assets under A-IFRS.

Each of our controlled entities, jointly controlled entities and associated entities has also been assessed, and generally each significant entity has at least one separate cash generating unit in its own right. Under AGAAP, we assessed recoverable amount on a similar basis, and there is no initial adjustment to the value of our assets. In accordance with AASB 1, the carrying amount of goodwill at transition date has been tested for impairment and no initial impairment losses were recognised on transition to A-IFRS.

(k) AASB 138: “Intangible Assets” (AASB 138)

As part of the IFRS project, intangibles recognised under previous AGAAP, including software assets developed for internal use and deferred expenditure, were reviewed to confirm that the criteria in AASB 138 have been met. Software assets developed for internal use, and deferred expenditure were reclassified from other current and non current assets to intangible assets on transition to AASB 138. We have also reclassified some software assets from property, plant and equipment to intangible assets for software that is not an integral part of property, plant and equipment.

Under previous AGAAP, we capitalised the subsidised component of mobile handsets that were sold as part of a service contract as a subscriber acquisition cost. This capitalised balance was then amortised over the contract term.

UIG 1042 “Subscriber Acquisition Costs in the Telecommunications Industry” (UIG 1042) was released by the AASB in December 2004 and prescribes the appropriate accounting treatment of subscriber acquisition costs based on the requirements of AASB 138. Specifically, UIG 1042 requires the cost of telephones provided to subscribers to be excluded from subscriber acquisition costs. As a result, under A-IFRS we have elected to expense mobile handset subsidies as incurred.


283




(k) AASB 138: “Intangible Assets” (AASB 138) (continued)

Our subsidiary in Hong Kong, HKCSL, has a licence to utilise 3G spectrum in Hong Kong until 2016. As part of this licence agreement, HKCSL are required to make annual payments for the right to use this spectrum. Under previous AGAAP we expensed these payments as incurred, except for those incurred during the construction of our 3G network in Hong Kong which were capitalised as part of the asset cost.

On adoption of AASB 138 and consistent with other 3G mobile operators in Hong Kong, the Telstra Group has recorded an intangible asset for this 3G spectrum licence, based on the present value of our expected future payments. This intangible asset is amortised over the term of the agreement. A corresponding accrual has also been recorded for our future obligations.


On transition, other current and non current assets of the Telstra Group and Telstra Entity decreased by $205 million and $34 million respectively for the write-off of deferred mobile handset subsidies, with a corresponding decrease in opening retained profits.

The intangible asset associated with our Hong Kong 3G spectrum licence amounted to $121 million on transition in the Telstra Group, representing the present value of our expected future payments under the licence. Under previous AGAAP these payments were expensed as incurred, with certain payments capitalised as part of the cost of our Hong Kong 3G network. Of the balance of the intangible asset, $25 million has been reclassified from property, plant and equipment that was capitalised under previous AGAAP. Trade and other payables have increased by $96 million ($3 million current and $93 million non current).

Software assets developed for internal use and deferred expenditure were reclassified from other assets and property, plant and equipment to intangible assets on transition to A-IFRS. This reclassification adjustment for the Telstra Group amounted to $2,601 million (Telstra Entity: $2,375 million) as at transition date. This comprised $286 million (Telstra Entity: $249 million) from other current assets, $2,292 million (Telstra Entity: $2,126 million) from other non current assets and $23 million from property, plant and equipment.


The write-off of deferred mobile handset subsidies decreased other current and non current assets of the Telstra Group and Telstra Entity by $241 million and $62 million respectively. Goods and services purchased for the year ended 30 June 2005 increased by $64 million.

The recognition of the Hong Kong 3G spectrum licence increased intangibles by $108 million, decreased property, plant and equipment by $24 million and increased trade and other payables by $89 million ($2 million current and $87 million non current) for the Telstra Group as at 30 June 2005. Other expenses decreased by $5 million, amortisation increased by $4 million and finance costs increased by $5 million for the year ended 30 June 2005.

The cumulative effect on the Telstra Group balance sheet at 30 June 2005 for the reclassification of software and deferred expenditure was to increase intangibles by $2,875 million (Telstra Entity: $2,534 million). This comprised $305 million (Telstra Entity: $264 million) from other current assets, $2,546 million (Telstra Entity: $2,270 million) from other non current assets and $24 million from property, plant and equipment.

(l) Nature of A-IFRS adjustments with effect from 1 July 2004

In the following tables, presentation adjustments reflect the reclassification of previously recognised amounts into their A-IFRS categories.

Accounting adjustments reflect the remeasurement of previously recognised amounts, or the recognition of additional amounts required under A-IFRS.


284



(l) Reconciliation of profit under previous AGAAP to A-IFRS for the year ended 30 June 2005 for the consolidated Telstra Group.

Telstra GroupYear ended 30 June 2005

Effect of transition to A-IFRSPrevious

AGAAPPresentationadjustments

Accountingadjustments A-IFRS

Note $m $m $m $m

IncomeRevenue (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d) 22,657 (476) - 22,181Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d) - 261 - 261

22,657 (215) - 22,442ExpensesLabour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(f) 3,693 - 165 3,858Goods and services purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(k) 4,147 - 64 4,211Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d),(e),(g),(i),(k) 4,055 (215) (25) 3,815

11,895 (215) 204 11,884

Share of net (gain)/loss from jointly controlled and associated entities. . . .36(b),(i) (9) - 103 9411,886 (215) 307 11,978

Earnings before interest, income tax expense, depreciation and amortisation (EBITDA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,771 - (307) 10,464Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . 36(b),(f),(h),(i),(k) 3,766 - (237) 3,529Earnings before interest and income tax expense (EBIT) . . . . . . . . . . . . . . . . . . 7,005 - (70) 6,935

Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a),(i) 103 - (20) 83Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d),(h),(i),(k) 839 - 124 963Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 736 - 144 880

Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,269 - (214) 6,055

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 1,822 - (76) 1,746

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,447 - (138) 4,309


285


36.Adoption of International Financial Reporting Standards (continued)

(l) Reconciliation of profit under previous AGAAP to A-IFRS for the year ended 30 June 2005 for the Telstra Entity.

Telstra EntityYear ended 30 June 2005

Effect of transition to A-IFRSPrevious

AGAAPPresentationadjustments

Accountingadjustments A-IFRS

Note $m $m $m $m

IncomeRevenue (excluding finance income) . . . . . . . . . . . . . . . . . . . . . . . . 36(c),(d) 19,944 (336) 223 19,831Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d) - 133 - 133

19,944 (203) 223 19,964ExpensesLabour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(f) 2,916 - 166 3,082Goods and services purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(k) 2,894 - 64 2,958Other expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(d),(e),(i) 3,666 (203) 15 3,478

9,476 (203) 245 9,518

Earnings before interest, income tax expense, depreciation and amortisation (EBITDA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,468 - (22) 10,446Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . .36(b),(f),(h),(i) 3,298 - (92) 3,206Earnings before interest and income tax expense (EBIT) . . . . . . . . . . . . . . . . . . 7,170 - 70 7,240

Finance income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a) 103 - (2) 101Finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(h),(i) 851 - 92 943Net finance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748 - 94 842

Profit before income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,422 - (24) 6,398

Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 1,777 - 105 1,882

Profit for the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,645 - (129) 4,516


286



(l) Reconciliation of balance sheet under previous AGAAP to A-IFRS as at transition date, 1 July 2004, for the consolidated Telstra Group.Telstra Group

1 July 2004Effect of transition to A-IFRS

Previous Presentation AccountingAGAAP adjustments adjustments A-IFRS

Note $m $m $m $mCurrent assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 687 - 3 690Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(m) 3,608 (192) - 3,416Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229 - - 229Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 169 - 169Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(k) 803 (286) (205) 312Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,327 (309) (202) 4,816Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(i)(m) 740 (387) (273) 80Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 - - 10Investments accounted for using the equity method . . . . . . . . . . . . . . . . . 40 - - 40Available for sale investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 - - 80Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . 36(g),(h),(k) 22,863 (23) (421) 22,419Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(g),(h),(k),(m) 3,605 2,580 (242) 5,943Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - - 2Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 238 - 238Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(f),(k) 2,326 (2,292) 503 537Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,666 116 (433) 29,349Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,993 (193) (635) 34,165

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(k) 2,338 - 3 2,341Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,246 - - 3,246Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 539 - - 539Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 358 - - 358Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,095 - - 1,095Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,576 - 3 7,579Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(e),(k) 49 - 130 179Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) 9,014 (429) - 8,585Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 1,807 - (36) 1,771Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 778 - - 778Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 410 - 410Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 408 - - 408Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,056 (19) 94 12,131Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,632 (19) 97 19,710Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,361 (174) (732) 14,455

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 6,073 (174) (113) 5,786Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c),(g),(i) (105) - 154 49Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,391 - (773) 8,618Equity available to Telstra Entity shareholders . . . . . . . . . . . . . . . . . . . . . 15,359 (174) (732) 14,453Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - - 2Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,361 (174) (732) 14,455


287



(l) Reconciliation of balance sheet under previous AGAAP to A-IFRS as at transition date, 1 July 2004, for the Telstra Entity.Telstra Entity

1 July 2004Effect of transition to A-IFRS

Previous Presentation AccountingAGAAP adjustments adjustments A-IFRS

Note $m $m $m $mCurrent assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 543 - 3 546Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(m) 3,258 (192) - 3,066Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206 - - 206Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 169 - 169Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(k) 687 (249) (205) 233Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,694 (272) (202) 4,220Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(m) 1,047 (387) (65) 595Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 - - 10Investments accounted for using the equity method . . . . . . . . . . . . . . . . . 32 - - 32Investments - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 5,435 - 77 5,512Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . .36(h) 21,600 - (367) 21,233Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(h),(k),(m) 236 2,354 (63) 2,527Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 238 - 238Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(f),(k) 2,160 (2,126) 495 529Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,520 79 77 30,676Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,214 (193) (125) 34,896

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,891 - - 1,891Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,527 - - 5,527Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 512 - - 512Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 331 - - 331Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 885 - - 885Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,146 - - 9,146Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(e) 46 - 37 83Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) 9,014 (429) - 8,585Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 1,748 - 248 1,996Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 740 - - 740Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 410 - 410Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 398 - - 398Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,946 (19) 285 12,212Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,092 (19) 285 21,358Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,122 (174) (410) 13,538

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 6,073 (174) (113) 5,786Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 277 - (83) 194Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,772 - (214) 7,558Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,122 (174) (410) 13,538


288



(l) Reconciliation of balance sheet under previous AGAAP to A-IFRS as at 30 June 2005 for the consolidated Telstra Group.Telstra Group30 June 2005

Effect of transition to A-IFRSPrevious Presentation Accounting

AGAAP adjustments adjustments A-IFRSNote $m $m $m $m

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 1,540 - 8 1,548Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(m) 3,577 (28) - 3,549Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 - - 232Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 4 - 4Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i),(k) 796 (305) (242) 249Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,145 (329) (234) 5,582Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 272 (131) (44) 97Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 - - 15Investments accounted for using the equity method . . . . . . . . . . . . 36(b),(i) 49 - (1) 48Property, plant and equipment. . . . . . . . . . . . . . . . . . . 36(d),(f),(g),(h),(k) 23,351 (24) (436) 22,891Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(b),(c),(g),(h),(i),(k),(m) 3,868 2,864 (403) 6,329Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - - 2Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(f),(k) 2,608 (2,546) 185 247Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,165 163 (699) 29,629Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,310 (166) (933) 35,211

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d),(i),(k) 2,809 - (2) 2,807Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) 1,518 (11) - 1,507Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 - - 534Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i) 389 - 32 421Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 11 - 11Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132 - - 1,132Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,382 - 30 6,412Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . 36(d),(e),(k) 122 - 128 250Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) 11,816 (875) - 10,941Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 1,885 - (81) 1,804Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i) 836 - 58 894Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 864 - 864Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 - - 388Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,047 (11) 105 15,141Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,429 (11) 135 21,553Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,881 (155) (1,068) 13,658

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 5,793 (155) (102) 5,536Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c),(g),(i) (157) - 4 (153)Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,243 - (970) 8,273Equity available to Telstra Entity shareholders . . . . . . . . . . . . . . . . . . . . . 14,879 (155) (1,068) 13,656Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - - 2Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,881 (155) (1,068) 13,658


289



(l) Reconciliation of balance sheet under previous AGAAP to A-IFRS as at 30 June 2005 for the Telstra Entity.Telstra Entity30 June 2005

Effect of transition to A-IFRSPrevious Presentation Accounting

AGAAP adjustments adjustments A-IFRSNote $m $m $m $m

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 1,360 - 8 1,368Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(a),(m) 3,566 (28) - 3,538Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 - - 194Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 4 - 4Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i),(k) 679 (264) (242) 173Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,799 (288) (234) 5,277Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 290 (131) (44) 115Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 - - 15Investments accounted for using the equity method . . . . . . . . . . . . . . 36(i) 44 - (3) 41Investments - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 6,029 - 107 6,136Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . .36(f),(h) 21,573 - (350) 21,223Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(b),(h),(i),(k),(m) 194 2,523 34 2,751Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(f),(k) 2,332 (2,270) 180 242Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,477 122 (76) 30,523Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,276 (166) (310) 35,800

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i) 1,957 - (1) 1,956Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) 3,903 (11) - 3,892Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 - - 519Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i) 324 - 32 356Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 11 - 11Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912 - - 912Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,615 - 31 7,646Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(e) 13 - 48 61Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) 11,782 (875) - 10,907Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 1,826 - 135 1,961Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(i) 779 - 58 837Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(m) - 864 - 864Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 - - 381Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,781 (11) 241 15,011Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,396 (11) 272 22,657Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,880 (155) (582) 13,143

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36(a) 5,793 (155) (102) 5,536Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36(c) 277 - (83) 194Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,810 - (397) 7,413Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,880 (155) (582) 13,143


290



(l) Reconciliation of equity under previous AGAAP to A-IFRS for the consolidated Telstra Group. Reserves

Share AssetForeign

currencyConsoli-dation Retained Minority

capital revaluation translation General fair value profits interests Total$m $m $m $m $m $m $m $m

Balance at 1 July 2004 under AGAAP . . 6,073 32 (186) 5 44 9,391 2 15,361Share-based payments. . . . . . . . 36(a) (287) - - - - 51 - (236)Income taxes . . . . . . . . . . . . . . .36(c) - (32) - - - 68 - 36Operating leases . . . . . . . . . . . . 36(e) - - - - - (37) - (37)Net defined benefit asset . . . . . . .36(f) - - - - - 537 - 537Foreign currency . . . . . . . . . . . . 36(g) - - 46 - - (343) - (297)Expensing of borrowing costs previously capitalised . . . . . . . . . . . . . . . 36(h) - - - - - (462) - (462)Equity accounting for Reach Ltd . . . 36(i) - - 140 - - (348) - (208)Expensing handset subsidies previously deferred . . . . . . . . . . . . . . . . . 36(k) - - - - - (239) - (239)Balance at 1 July 2004 under A-IFRS. . . . 5,786 - - 5 44 8,618 2 14,455

Balance at 30 June 2005 under AGAAP . . 5,793 32 (231) 4 38 9,243 2 14,881Share-based payments. . . . . . . . 36(a) (257) - - - - 66 - (191)Cease amortisation of goodwill . . 36(b) - - - - - 147 - 147Income taxes . . . . . . . . . . . . . . .36(c) - (32) 9 - - 167 - 144Deferred payment for equipment . 36(d) - - - - - (27) - (27)Operating leases . . . . . . . . . . . . 36(e) - - - - - (48) - (48)Net defined benefit asset . . . . . . .36(f) - - - - - 271 - 271Foreign currency . . . . . . . . . . . . 36(g) - - (111) - - (332) - (443)Expensing of borrowing costs previously capitalised . . . . . . . . . . . . . . . 36(h) - - - - - (458) - (458)Equity accounting for Reach Ltd . . . 36(i) - - 140 - - (450) - (310)Recognition of Hong Kong 3G spectrum licence . . . . . . . . . . . . . . . . . . 36(k) - - (2) - - (3) - (5)Expensing handset subsidies previously deferred . . . . . . . . . . . . . . . . . 36(k) - - - - - (303) - (303)Balance at 30 June 2005 under A-IFRS . . 5,536 - (195) 4 38 8,273 2 13,658


291



(l) Reconciliation of equity under previous AGAAP to A-IFRS for the Telstra Entity.Reserves

Share Asset Retainedcapital revaluation General profits Total

$m $m $m $m $m

Balance at 1 July 2004 under AGAAP . . . . . 6,073 277 - 7,772 14,122Share-based payments. . . . . . . . . . .36(a) (287) - - 51 (236)Income taxes . . . . . . . . . . . . . . . . . 36(c) - (83) - (88) (171)Property, plant and equipment. . . . . .36(d) - (194) 194 - -Operating leases . . . . . . . . . . . . . . . 36(e) - - - (37) (37)Net defined benefit asset . . . . . . . . . 36(f) - - - 529 529Expensing of borrowing costs previously capitalised . . . . . . . . . . . . . . . . . .36(h) - - - (430) (430)Expensing handset subsidies previously deferred . . . . . . . . . . . . . . . . . . . . 36(k) - - - (239) (239)Balance at 1 July 2004 under A-IFRS. . . . . . 5,786 - 194 7,558 13,538

Balance at 30 June 2005 under AGAAP . . . . 5,793 277 - 7,810 13,880Share-based payments. . . . . . . . . . .36(a) (257) - - 66 (191)Cease amortisation of goodwill . . . . .36(b) - - - 4 4Income taxes . . . . . . . . . . . . . . . . . 36(c) - (83) - 55 (28)Property, plant and equipment. . . . . .36(d) - (194) 194 - -Operating leases . . . . . . . . . . . . . . . 36(e) - - - (48) (48)Net defined benefit asset . . . . . . . . . 36(f) - - - 266 266Expensing of borrowing costs previously capitalised . . . . . . . . . . . . . . . . . .36(h) - - - (431) (431)Accounting for investments . . . . . . . . 36(i) - - - (6) (6)Expensing handset subsidies previously deferred . . . . . . . . . . . . . . . . . . . . 36(k) - - - (303) (303)Balance at 30 June 2005 under A-IFRS . 5,536 - 194 7,413 13,143


292



(l) Reconciliation of the statement of cash flows under previous AGAAP to A-IFRS.

As a result of the adoption of A-IFRS, the following reclassifications have been made to the statement of cash flows:

(i) Interest received has been reclassified from operating activitiesto investing activities (Telstra Group: $80 million, Telstra Entity:$81 million);

(ii) Borrowing costs paid has been reclassified from operating activities to cash flows from financing activities and renamed finance costs (Telstra Group: $879 million, Telstra Entity: $892 million);

(iii) Dividends received are classified as cash flows from investing activities after previously being included in cash flows from operating activities (Telstra Group: $2 million, Telstra Entity: $1 million);

(iv) Loans to jointly controlled and associated entities was reclassified from financing activities to investing activities (Telstra Group:$37 million, Telstra Entity: nil); and

(v) Adjustments required as a result of the consolidation of Growthshare. For further information refer to note 36(a).

Year ended 30 June 2005Telstra Group Telstra Entity

PreviousAGAAP Adjustments A-IFRS

PreviousAGAAP Adjustments A-IFRS

$m $m $m $m $m $m

Cash flows from operating activities . . . .(i),(ii),(iii) 8,163 797 8,960 7,742 810 8,552Cash flows from investing activities . . (i),(iii),(iv),(v) (3,809) 43 (3,766) (2,890) 80 (2,810)Cash flows from financing activities. . . . (ii),(iv),(v) (3,512) (835) (4,347) (4,035) (885) (4,920)

Net increase in cash . . . . . . . . . . . . . . . . . . . (v) 842 5 847 817 5 822


293


A-IFRS adjustments with effect from 1 July 2005

(m) AASB 132: “Financial Instruments: Disclosure and Presentation” (AASB 132), AASB 139: “Financial Instruments: Recognition and Measurement” (AASB 139) and AASB 7: “Financial Instruments: Disclosures” (AASB 7)

We have elected to apply the exemption available under AASB 1 to apply AASB 132: “Financial Instruments: Disclosure and Presentation” and AASB 139: “Financial Instruments: Recognition and Measurement” from 1 July 2005. Accordingly, we have changed our accounting policies for financial instruments from 1 July 2005.

In addition, we have elected to early adopt AASB 7 from 1 July 2005. AASB 7 supersedes the disclosure requirements, but not the presentation requirements of AASB 132.

The transitional rules for first time adoption of A-IFRS required that we restate our comparative financial report using A-IFRS, except for financial instruments within the scope of AASB 132 and AASB 139 where comparative information was not required to be restated. The early adoption of AASB 7 did not require comparative information for fiscal 2005 to be restated and disclosed. Accordingly, we have applied previous AGAAP in the comparative information on financial instruments within the scope of AASB 132 and AASB 139.

Under previous AGAAP disclosures, derivative financial instruments were classified within other assets and other liabilities. For comparative purposes these previous AGAAP amounts have been reclassified to derivative financial assets or liabilities on the balance sheet on transition to A-IFRS. The effect of changes in the accounting policies for financial instruments including derivatives, as a result of the adoption of AASB 132 and AASB 139 as at 1 July 2005 is shown below.



294


(m) Reconciliation of balance sheet under A-IFRS for AASB 132/139 adoption as at 1 July 2005 for the consolidated Telstra Group


Telstra GroupA-IFRS AASB 132/139 A-IFRS

30 June 2005 adjustments 1 July 2005Note $m $m $m

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,548 - 1,548Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,549 - 3,549Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232 - 232Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 4 6 10Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 - 249Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,582 6 5,588Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 97 - 97Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 - 15Investments accounted for using the equity method . . . . . . . . . . . . . . . . . 48 - 48Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,891 - 22,891Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,329 - 6,329Deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 2Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) - 512 512Defined benefit assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 - 247Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,629 512 30,141Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,211 518 35,729

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,807 - 2,807Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) 1,507 3 1,510Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 534 - 534Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 421 - 421Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 11 5 16Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132 - 1,132Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,412 8 6,420Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250 - 250Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) 10,941 219 11,160Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) 1,804 32 1,836Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 894 - 894Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 864 185 1,049Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 388 - 388Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,141 436 15,577Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,553 444 21,997Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,658 74 13,732

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,536 - 5,536Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iv) (153) 79 (74)Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (v) 8,273 (5) 8,268Equity available to Telstra Entity shareholders . . . . . . . . . . . . . . . . . . . . . 13,656 74 13,730Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 - 2Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,658 74 13,732


295


(m) Reconciliation of balance sheet under A-IFRS for AASB 132/139 adoption as at 1 July 2005 for the Telstra Entity


Telstra EntityA-IFRS AASB 132/139 A-IFRS

30 June 2005 adjustments 1 July 2005Note $m $m $m

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,368 - 1,368Trade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,538 3 3,541Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194 - 194Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 4 6 10Prepayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173 - 173Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,277 9 5,286Non current assetsTrade and other receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 1 116Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 - 15Investments accounted for using the equity method . . . . . . . . . . . . . . . . . 41 - 41Investments - other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,136 - 6,136Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,223 - 21,223Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,751 - 2,751Derivative financial assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) - 512 512Defined benefit assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242 - 242Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,523 513 31,036Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,800 522 36,322

Current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,956 - 1,956Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) 3,892 3 3,895Current tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 519 - 519Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356 - 356Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 11 5 16Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 912 - 912Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,646 8 7,654Non current liabilitiesTrade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 1 62Borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii) 10,907 219 11,126Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iii) 1,961 32 1,993Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 837 - 837Derivative financial liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .(i) 864 185 1,049Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 381 - 381Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,011 437 15,448Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,657 445 23,102Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,143 77 13,220

EquityShare capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,536 - 5,536Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (iv) 194 82 276Retained profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (v) 7,413 (5) 7,408Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,143 77 13,220


296


(m) AASB 132: “Financial Instruments: Disclosure and Presentation” (AASB 132), AASB 139: “Financial Instruments: Recognition and Measurement” (AASB 139) and AASB 7: “Financial Instruments: Disclosures” (AASB 7) (continued)

Adjustments were made at the date of transition (1 July 2005) to restate the opening balance sheet of the Telstra Group to a position consistent with the accounting policies specified in note 2. These are listed below. Also included is where the transitional provisions will have an effect on future periods.

(i) From 1 July 2005, the recognition and measurement of all derivatives (including any embedded derivatives) is at fair value. Changes in fair value are either taken to the income statement or an equity reserve. At 1 July 2005, a $328 million increase in net assets for the Telstra Group and Telstra Entity was recognised representing:

• a gain of $333 million on the remeasurement of our interest rate swaps and cross currency swaps to fair value; and

• a loss of $5 million on the remeasurement of forward foreign exchange contracts to fair value.

These adjustments are reflected in the previous table as:

• an increase in current assets (derivative financial assets) of$6 million for the Telstra Group and the Telstra Entity;

• an increase in non current assets (derivative financial assets) of $512 million for the Telstra Group and Telstra Entity;

• offset by an increase in current liabilities (derivative financial liabilities) of $5 million for the Telstra Group and Telstra Entity; and

• an increase in non current liabilities (derivative financial liabilities) of $185 million for the Telstra Group and Telstra Entity.

At 1 July 2005, there were no material embedded derivatives which required separate measurement and reporting.

(ii) From 1 July 2005, the carrying value of the hedged item in fair value hedges is adjusted for fair value movements attributable to the hedged risk. At 1 July 2005 a loss of $222 million was recognised for the Telstra Group and Telstra Entity on the remeasurement of our foreign currency borrowings in fair value hedges. This loss is capped such that the adjustment is the lower of:

• the remeasurement to fair value of the hedged item for the designated hedged risk; and

• the remeasurement to fair value of the hedging instrument.

At 1 July 2005, the impact of ‘capping’ the fair value movement on our foreign currency borrowings in fair value hedges was $70 million for both the Telstra Group and Telstra Entity. This ‘capping’ amount will be amortised to the income statement on an effective yield to maturity basis over the term of the underlying borrowing.

This adjustment is reflected in the above table as an increase in current borrowings of $3 million and an increase in non current borrowings of $219 million for both the Telstra Group and Telstra Entity.

(iii) At 1 July 2005, a $32 million increase in non current deferred tax liabilities was recognised for both the Telstra Group and Telstra Entity, representing the tax effect of the above adjustments.

(iv) From 1 July 2005, the effective portion of the movement in fair value of derivatives accounted for as cash flow hedges is deferredin equity until such time as the hedged item affects profit or loss.The ineffective portion is recognised immediately in the income statement. At 1 July 2005 a post tax net increase in reserves of $79 million for the Telstra Group and $82 million for the Telstra Entity was recognised representing:

• an increase of $81 million for both the Telstra Group and Telstra Entity to the cash flow hedging reserve, comprising the deferred portion of the fair value of our interest rate swaps and cross currency swaps in cash flow hedges relating to our foreign currency borrowings; and

• a decrease of $2 million (Telstra Entity: an increase of $1 million) to the cash flow hedging reserve, comprising the deferred portion of the fair value of our forward foreign exchange contracts in cash flow hedges of highly probable forecast transactions.

(v) At 1 July 2005, the reduction to retained earnings of $5 million for both the Telstra Group and Telstra Entity comprised:

• a decrease of $222 million on the remeasurement of our foreign currency borrowings in fair value hedges;

• an increase of $215 million on the remeasurement of our derivatives, excluding the portion deferred in equity relating to our cash flow hedges; and

• an increase of $2 million for the tax effect.

(vi) From 1 July 2005, movement in the fair value of derivatives accounted for as fair value hedges, together with the gain or loss on the related hedged item attributable to the hedged risk will be recognised in the income statement.



297


Reconciliations to financial reports prepared using USGAAP

Our consolidated financial report is prepared in accordance with the Australian equivalents of International Financial Reporting Standards (A-IFRS), which differs in certain respects from the accounting principles generally accepted in the United States (USGAAP). The significant differences between A-IFRS and USGAAP are presented throughout note 37.

37. United States generally accepted accounting principles disclosures


Restated2006 2006 2005

Note $m US$m $m

Reconciliation of net income to USGAAP

A-IFRS net income reported in income statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,181 2,362 4,309

Adjustments required to agree with USGAAPProperty, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(c) (26) (19) (61)Borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(d) (27) (20) (18)Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(e) - - 17Retirement benefit (expense)/gain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(f) (44) (33) 1Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(g) (85) (63) (10)Employee compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(h) - - (7)Derivative financial instruments and hedging activities . . . . . . . . . . . . . . . . . . . . . . . . . . .37(i) 192 144 (96)CSL New World Mobility Limited (formerly Telstra CSL Limited) . . . . . . . . . . . . . . . . . . . . . . 37( j) (634) (471) -Fair value / general reserve adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(k) - - 5Redundancy and restructuring provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(m) 161 119 -Mobile handset subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(n) - - 64Cumulative effect of changes in accounting principles, net of tax . . . . . . . . . . . . . . . . . . . . 37(b) (245) (181) -Net income per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,473 1,838 4,204

Income statement measured and classified per USGAAP(i)

Operating revenue. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,779 16,909 22,167Operating expenses:Labour . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,381 3,252 3,865Goods and services purchased (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,235 3,144 3,442Depreciation and amortisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,871 3,616 3,715Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,829 3,585 4,556Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,316 13,597 15,578Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,463 3,312 6,589Net interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (672) (499) (767)Share of net gain/(loss) of jointly controlled and associated entities . . . . . . . . . . . . . . . . . . . . . 5 4 (94)Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 387 288 232Net income before income tax expense and minority interests . . . . . . . . . . . . . . . . . . . . . . . . . 4,183 3,105 5,960Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(g) 1,465 1,086 1,756Net income before cumulative effect adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,718 2,019 4,204Cumulative effect of changes in accounting principles, net of tax . . . . . . . . . . . . . . . . . . . . 37(b) (245) (181) -Net income per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,473 1,838 4,204

¢ US¢ ¢Dividends paid per share per USGAAP(iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.0 29.7 33.0


298


Reconciliations to financial reports prepared using USGAAP (continued)

USGAAP earnings per share

37. United States generally accepted accounting principles disclosures (continued)


Restated2006 2006 2005

Note ¢ US¢ ¢

Basic earnings per share before cumulative effect of change in accounting principles. . . . . . . . . . . 22.0 16.3 33.8Cumulative effect of change in accounting principles (net of tax):Mobile handset subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(b) (1.7) (1.3) -Capitalisation of pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(b) (0.3) (0.2) -Basic earnings per share per USGAAP (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.0 14.8 33.8

Dilutive earnings per share before cumulative effect of change in accounting principles . . . . . . . . . 21.9 16.3 33.7Cumulative effect of change in accounting principles (net of tax):Mobile handset subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(b) (1.7) (1.3) -Capitalisation of pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(b) (0.3) (0.2) -Diluted earnings per share per USGAAP (cents) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19.9 14.8 33.7


299


Total comprehensive income disclosure

Total comprehensive income is calculated by adding net income and other comprehensive income.

Other comprehensive income/(loss) represents movements in shareholders’ equity that are not related to contributions from owners or payments to owners.

The reclassification from accumulated other comprehensive income/(loss) to net income was determined on the basis of specific identification. Included within other comprehensive income for the year ended 30 June 2006 is the reclassification of $132 million from the foreign currency translation reserve to the dilution loss recognised as part of the merger between CSL and New World PCS Holdings Limited (New World Mobility). Refer to note 37(j) for further details.

In fiscal 2006, the proceeds from sales of available-for-sale equity securities was $nil (2005: $141 million).

The gain recorded as part of other comprehensive income/(loss) in relation to derivative and non derivative instruments that have been designated as hedges of the foreign currency exposure of our net investments in foreign operations for fiscal 2006 was $50 million (2005: $31 million gain).

(i) Income statement reclassifications

Various income statement items under A-IFRS have been reclassified to comply with USGAAP presentation rules. These include:

• net gain on disposal of non current assets of $85 million (2005:$88 million) is recorded as other operating income under A-IFRS but other non-operating income for USGAAP;

• rent from property and motor vehicles of $22 million (2005:$20 million) is recorded as other operating revenue under A-IFRS but other non-operating income for USGAAP;

• loss on foreign currency transactions of $2 million (2005: $40 million gain) is recorded as other operating expenses under A-IFRS but other non-operating income for USGAAP;

• miscellaneous income of $243 million (2005: $173 million) is recorded in other operating income under A-IFRS but other non-operating income for USGAAP; and

• under A-IFRS, dealer commissions and bonuses of $493 million (2005: $711 million) are included in goods and services purchased as they are directly related to our sales revenue. Under USGAAP they are classified as other operating expenses.

(ii) Goods and services purchased

Cost of sales includes both direct and indirect costs involved in the sale of the Company’s goods and services. For a service company this would commonly include depreciation and other indirect costs associated with the provision of services. However, we do not report our costs according to this description and classify all of our expenses according to the nature of the expense, referred to as “goods and services purchased” in relation to the sale of goods and services.

Goods and services purchased mainly comprises:• network service capacity from external communication service

providers;• mobile handsets sold to customers;• cost of goods sold (other than mobile handsets); and• directory paper costs.

Goods and services purchased does not equate to cost of sales due to the non inclusion of depreciation and other indirect costs associated with the provision of our telecommunications services.

(iii) Dividends paid per share

Dividends paid per share for USGAAP includes TESOP97 and TESOP99 options outstanding as issued shares. Refer to note 37(h).



2006 2005$m $m

Net income per USGAAP . . . . . . . . . . . . 2,473 4,204USGAAP other comprehensive income/(loss) 125 (273)USGAAP total comprehensive income. . . . 2,598 3,931

Telstra GroupYear ended

30 June2006 2005

$m $m

Foreign currency translation reserve . . . . . . . . . 125 (241)Unrealised gain on available-for-sale securities, after tax of $nil (2005: $4 million decrease) . . . . . - 14Realised gain on sale of available-for-sale securities transferred to net income, after tax of $nil (2005: $10 million decrease) . . . . . . . . . . . . - (46)USGAAP other comprehensive income/(loss) . . . . 125 (273)


300





Restated2006 2006 2005

Note $m US$m $m

Reconciliation of shareholders' equity to USGAAP

A-IFRS shareholders' equity per balance sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,832 9,525 13,658

Cumulative adjustments required to agree with USGAAPProperty, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(c) (203) (151) (177)Borrowing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(d) 543 403 570Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(e) (63) (47) (63)Minority interests(iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (246) (183) (2)Retirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(f) (1,242) (921) (193)Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(g) 255 189 (59)Derivative financial instruments and hedging activities . . . . . . . . . . . . . . . . . . . . . . . . . . .37(i) (195) (145) (370)CSL New World Mobility Limited (formerly Telstra CSL Limited) . . . . . . . . . . . . . . . . . . . . . . 37( j) (56) (42) 542Fair value / general reserve adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(k) (54) (40) (54)Goodwill and other intangible asset adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37(l) 71 53 41Redundancy and restructuring provision. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(m) 161 120 -Mobile handset subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(n) - - 303Shareholders' equity per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,803 8,761 14,196

Balance sheet measured and classified per USGAAP

Current assetsCash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 689 511 1,548Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,701 2,747 3,515Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 224 166 232Deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(g) 376 279 294Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 243 181 249Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,233 3,884 5,838Non current assetsReceivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121 90 65Derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 159 369Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 20 15 15Investments - accounted for using the equity method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 20 52Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,632 37,584 48,380Accumulated depreciation of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . (26,663) (19,792) (25,037)Goodwill, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,087 1,549 2,618Other intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,101 3,044 4,662Prepaid pension assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(f) 5 4 78Total non current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,544 22,673 31,202Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,777 26,557 37,040


301





Restated2006 2006 2005

Note $m US$m $m

Balance sheet measured and classified per USGAAP (continued)

Current liabilitiesPayables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,570 2,650 2,766Borrowings - short term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,583 1,175 463Borrowings - long term debt due within one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 401 298 1,061Income tax payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 428 318 534Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 662 491 421Other current liabilties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,187 881 1,150Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,831 5,813 6,395Non current liabilitiesPayables. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112 83 257Derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525 390 859Borrowings - long term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,734 8,710 11,641Deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(g) 1,971 1,463 2,300Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 888 659 894Accrued pension liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37(f) 172 128 -Other non current liabilties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 367 496Total non current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,897 11,800 16,447Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,728 17,613 22,842

Minority interests(iii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 246 183 2

Net assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,803 8,761 14,196

Shareholders' equityShare capital - 12,443,074,357 shares issued at 30 June 2006 (2005: 12,443,074,357 shares) (i) . . . . . 21 5,793 4,300 5,793Share loan to employees - 55,104,025 shares at 30 June 2006 (2005: 60,378,525 shares) . . . . . . . . 21 (130) (96) (154)Shares held by employee share plan trusts - 17,931,918 shares at 30 June 2006 (2005: 20,216,091 shares) (99) (73) (113)Additional paid in capital from employee share plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390 289 395Total share capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,954 4,420 5,921Accumulated other comprehensive loss (ii) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (604) (448) (729)Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,453 4,789 9,004Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,803 8,761 14,196


302



(i) Share capital

Number of shares issued includes shares issued to employees under share loans and shares held by employee share plan trusts. Net balance of shares issued and outstanding at 30 June 2006 is 12,370,038,414 shares (2005: 12,362,479,741 shares).

(ii) Accumulated other comprehensive loss

Accumulated other comprehensive loss, net of related tax, for USGAAP consists of the following components:

As part of the merger between CSL and New World Mobility, $132 million was reclassified from accumulated other comprehensive loss to the dilution loss recognised on the merger. Refer to note 37(j) for further details.

(iii) Minority interest

Under A-IFRS, minority interests are presented within equity, but separate from the parent shareholders’ equity. Under USGAAP, minority interests are presented outside equity, in between liabilities and equity. The effect of this adjustment has been disclosed in the reconciliation of shareholders’ equity to USGAAP.

37(a) Immaterial adjustments to previously reported USGAAP amounts

As discussed in note 36, we have adopted A-IFRS from 1 July 2005. This adoption required us to restate our financial information for the year ended 30 June 2005 to comply with A-IFRS. As part of this process, a number of immaterial adjustments have been made to our previously reported USGAAP amounts. As such we have restated certain USGAAP financial measures for the year ended 30 June 2005. The impact of these adjustments is as follows:

Hong Kong 3G spectrum licence

Our subsidiary in Hong Kong, HKCSL, has a licence to utilise 3G spectrum in Hong Kong until 2016. As part of this licence agreement, HKCSL are required to make annual payments for the right to use this spectrum. Under previous AGAAP we expensed these payments as incurred and historically we have not recorded a USGAAP adjustment for this licence.



2006 2005$m $m

Foreign currency translation reserve . . . . . . . . (591) (716)

Derivative financial instruments . . . . . . . . . . . . (19) (19)(tax effect) . . . . . . . . . . . . . . . . . . . . . . . . . 6 6

(13) (13)Accumulated other comprehensive loss (net of tax) (604) (729)

Telstra Group30 June 2005

$m

Reconciliation of net incomeNet income per USGAAP - as previously reported. . . . . 4,172Adjustments:- Hong Kong 3G spectrum licence . . . . . . . . . . . . . . (5)- Reach committed capex liability . . . . . . . . . . . . . . (90)- Operating leases . . . . . . . . . . . . . . . . . . . . . . . . (11)- Functional currency . . . . . . . . . . . . . . . . . . . . . . 11- Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 123- Tax effect of above adjustments . . . . . . . . . . . . . . 4Net income per USGAAP - restated. . . . . . . . . . . . . . 4,204

cents pershare

Basic earnings per share per USGAAP - as previously reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.6Basic earnings per share per USGAAP - restated . . . . . 33.8Diluted earnings per share per USGAAP - as previously reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.5Diluted earnings per share per USGAAP - restated . . . . 33.7

Reconciliation of shareholders’ equity $mShareholders’ equity per USGAAP - as previously reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,367Adjustments:- Hong Kong 3G spectrum licence . . . . . . . . . . . . . . 14- Reach committed capex liability . . . . . . . . . . . . . . (93)- Operating leases . . . . . . . . . . . . . . . . . . . . . . . . (34)- Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (58)Shareholders’ equity per USGAAP - restated . . . . 14,196


303



Hong Kong 3G spectrum licence (continued)

However, under USGAAP this licence should have been capitalised as an intangible asset on acquisition, based on the present value of the expected future payments, with a corresponding liability also recorded.

The adjustment to decrease net income per USGAAP for the year ended 30 June 2005 of $5 million is a result of additional amortisation of $5 million and an increase in net interest expense of $4 million associated with the unwinding of the present value discount, offset by a decrease in other operating expenses of $4 million due to the reversal of the licence payments expense.

The increase in shareholders’ equity per USGAAP as at 30 June 2005 of $14 million represents an increase in intangible assets ($108 million), a decrease in property, plant and equipment ($24 million), an increase in current and non-current payables ($2 million and $87 million respectively) and a decrease in deferred tax liabilities ($19 million).

Due to the adoption of A-IFRS there is no longer a USGAAP adjustment for this 3G spectrum licence. Refer to note 36(k).

Reach committed capex liability

During fiscal 2005, we agreed to fund the committed capital expenditure of our jointly controlled entity Reach, together withour co-shareholder PCCW Limited, for the period until 2022. Our share of this commitment was disclosed as a contingent liability under previous AGAAP and a USGAAP adjustment was recorded in our30 June 2005 financial statements to recognise additional equity accounted losses only to the extent of our actual payments under the commitment to 30 June 2005.

However, under USGAAP we were required to recognise additional equity accounted losses in Reach for our entire capital expenditure commitment, not just the amount paid. This adjustment has given rise to an additional $88 million of equity accounted losses and an additional $2 million of interest expense for the year ended 30 June 2005.

The decrease in shareholders’ equity per USGAAP as at 30 June 2005 of $93 million represents an increase in current and non-current provisions of $32 million and $58 million respectively and a decrease in investments accounted for using the equity method of $3 million.

Due to the adoption of A-IFRS there is no longer a USGAAP adjustment for our commitment to Reach. Refer to note 36(i).

Operating leases

Under previous AGAAP we expensed our operating lease payments as incurred and in our previously published financial statements we did not record a USGAAP adjustment to recognise operating lease expenses on a straight line basis. The impact of this adjustment is an increase to other operating expenses of $11 million for the year ended 30 June 2005. Non-current payables increased by $48 million and deferred tax liability decreased by $14 million as at 30 June 2005.

Due to the adoption of A-IFRS there is no longer a USGAAP adjustment for operating leases. Refer to note 36(e).

Functional currency

During the assessment of the functional currency for each of our overseas operations as part of our adoption of A-IFRS, we discovered that the functional currency of Telstra Global Limited under USGAAP was incorrect. This restatement has resulted in a decrease in other operating expenses of $11 million for the year ended 30 June 2005, with a corresponding increase in other comprehensive income.

Due to the adoption of A-IFRS there is no longer a USGAAP adjustment for the functional currency of our overseas operations. Refer to note 36(g).

Income taxes

In our 30 June 2005 financial statements, the USGAAP adjustment to net income for income taxes has been adjusted by $123 million due to the following:

• adjusting the tax effect of our USGAAP adjustments for property, plant and equipment, resulting in a decrease in tax expense of$44 million;

• adjustment to the deferred tax on our investments accounted for using the equity method, resulting in a decrease in tax expense of $93 million; and

• not appropriately recognising deferred taxes for various balances, including intangible assets recognised on acquisitions, resulting in a $14 million increase in tax expense.

The majority of these adjustments to tax expense have arisen as a result of the related deferred tax balances being written off under USGAAP during the year ended 30 June 2005. However, with the adoption of A-IFRS these adjustments were recorded in the A-IFRS opening transition balance sheet at 1 July 2004. As such, the different timing of recording these adjustments for A-IFRS and USGAAP purposes has resulted in the majority of these adjustments.The decrease in shareholders’ equity for USGAAP as at 30 June 2005 of $58 million represents a decrease in goodwill of $6 million and an increase in deferred tax liability of $52 million. Accumulated other comprehensive income was also reduced by $26 million.



304



37(b) Changes in accounting principles under USGAAP

Mobile handset subsidies

We previously deferred subsidies on mobile handset sold as part of a bundled arrangement under USGAAP. This was based on the fact that the revenue allocated to subsidised handsets in accordance with EITF 00-21 “Revenue Arrangements with Multiple Deliverables” (EITF 00-21), is contingent upon the delivery of the contracted services and is therefore recognised over the expected customer contract life. As such we previously recognised the subsidised cost of the handsets on a similar basis.

From 1 July 2005, we have changed our accounting principle to expense handset subsidies as incurred. This change was adopted in order to ensure consistency with the accounting principle we have elected to adopt under A-IFRS. Furthermore, this change in principle treats the handset as a separate deliverable from a cost viewpoint which is consistent with the principles of EITF 00-21.

This change in accounting principle has resulted in the write off of $303 million of previously deferred handset subsidies as at 1 July 2005, with an adjustment to deferred tax liability of $91 million.

Capitalisation of pension cost

Historically we have recorded a USGAAP adjustment to recognise an expense (or benefit) for the defined benefit plans that we sponsor (refer to note 37(f)). From 1 July 2005 we have changed our accounting principle to capitalise a portion of our pension cost/benefit under USGAAP, where that cost/benefit is attributable to employees who are directly engaged in the construction of our property, plant and equipment, for the period of time that those employees spend on the construction work. Previously we have not capitalised a portion of this cost/benefit.

This change in accounting principle is preferable as the pension cost/benefit is considered an additional labour cost and this change would ensure consistency with how we treat other labour costs. It is also consistent with our accounting principle under A-IFRS.

This change has resulted in a decrease to property, plant and equipment on 1 July 2005 of $47 million, with an associated increase in deferred tax liability of $14 million.



305


Notes to the reconciliations to financial reports prepared using USGAAP

37(c) Property, plant and equipment

Revaluations

Certain items of property, plant and equipment had been previously revalued under A-IFRS. Revaluations of property, plant and equipment are not allowed under USGAAP, except for permanent impairments. As such we have reversed previously revalued property, plant and equipment to historical cost for USGAAP purposes.

Under A-IFRS, we have deemed the carrying value of our property, plant and equipment to be cost and as such we no longer revalue property, plant and equipment.

Depreciation expense and disposal gains or losses under A-IFRS are based on the recorded amount of the asset and are therefore higher (or lower for disposal losses) for assets that had been previously revalued upwards. Depreciation expense and disposal gains and losses have been adjusted to reflect amounts based on the original cost of the asset for USGAAP.

Impairment loss reversal - Hybrid Fibre Coaxial (HFC) cable network

In fiscal 1997, we wrote down the value of our HFC cable network by $587 million. This writedown continues to be reflected in the HFC network’s carrying value under A-IFRS. Under USGAAP, the initial future undiscounted cash flows derived from our HFC network were greater than the recorded value and continue to be as at 30 June 2006. As a result, the writedown has been reversed for USGAAP. Depreciation expense has also been increased under USGAAP due to the higher asset value.

Indirect costs

Before 1 July 1996, we expensed all indirect costs as incurred. Under USGAAP, those indirect costs associated with operations and management personnel directly involved in the construction of our communication assets have been systematically allocated and recorded as part of the cost of those assets and depreciated accordingly.

From 1 July 1996, we changed our accounting policy in relation to indirect cost capitalisation to be consistent with USGAAP.

Sale of property sold as part of a sale and lease back transaction

In fiscal 2003, we sold certain land and buildings under a sale and leaseback arrangement. The net gain on the sale was recognised in net income.

Under USGAAP, the gains made on the sale of land and buildings as part of the sale and leaseback transaction were deferred and are currently being recognised over the period of the underlying leases. The original gain deferred for USGAAP was $177 million.

Purchase of radio access network (RAN) assets

In fiscal 2005, we entered into an arrangement with Hutchison 3G Australia Pty Ltd (H3GA) to jointly own and operate H3GA’s existing third generation RAN assets and fund future network development. The purchase consideration for our share of the RAN assets was$447 million, payable over 2 years.

Under A-IFRS, the purchase consideration was discounted using an asset specific discount rate. Under USGAAP, an incremental borrowing rate was used to discount the purchase consideration. The difference in the discount rate has resulted in a higher asset value and depreciation expense under USGAAP, offset by lower borrowing costs associated with the unwinding of the discount.

Refer to note 37(e) for further information on the 3G Partnership.

Summary of property, plant and equipment adjustments

37(d) Borrowing costs

Under A-IFRS, we expense all borrowing costs when incurred. Under USGAAP, borrowing costs relating to the construction of property, plant and equipment and software developed for internal use are recorded as part of the asset cost. The capitalised borrowing costs also result in higher depreciation expense under USGAAP.

For USGAAP purposes, we have capitalised borrowing costs with a net book value of $543 million as at 30 June 2006 (2005: $570 million). Additional depreciation and disposals of $108 million (2005: $108 million) have been recorded for the year ended 30 June 2006, offset by a decrease in interest expense of $81 million (2005: $90 million).


Telstra Group

Net IncomeShareholders’

EquityYear ended / As at 30 June

2006 2005 2006 2005$m $m $m $m

Revaluations . . . . . . . . . . 6 6 (593) (599)HFC cable network . . . . . . (23) (25) 144 167Indirect costs . . . . . . . . . . (39) (60) 342 381Sale and leaseback . . . . . . 18 18 (108) (126)RAN assets . . . . . . . . . . . 12 - 12 -

(26) (61) (203) (177)


306


Notes to the reconciliations to financial reports prepared using USGAAP (continued)

37(e) Investments

3GIS Partnership

The 3GIS Partnership was established to operate the third generation radio access network (RAN) as discussed in note 37(c). The partners each made an initial investment of $1 but provide additional capital as required in the form of interest-free loans.

Under A-IFRS, we recognise our share of the RAN assets held by the partnership within property, plant and equipment. Expenses incurred by the partnership are on-charged to the partners in equal proportion.

Under USGAAP, we account for the 3GIS Partnership using the equity method. As such, the interest-free loans are considered to form part of the investment in the partnership, and we record our share of the partnership’s results against this investment.

PCCW Limited (PCCW) Converting Note

Under A-IFRS, our converting note issued by PCCW was carried at face value, with adjustments for accrued interest and foreign exchange movements recorded in the income statement in operating expenses. Under USGAAP, the instrument was classified as an available-for-sale security with changes in fair value being recorded in other comprehensive income.

On 30 June 2005, the note expired and was redeemed for $76 million. Under USGAAP, the balance recorded in other comprehensive income was transferred to net income on redemption.

Reach Ltd (Reach)

In fiscal 2001, as a part of the strategic alliance with PCCW, a jointly controlled entity, Reach, was formed through the combination of our international wholesale business and certain other wholesale assets together with certain PCCW assets.

Under USGAAP, this investment was recorded at the net book value of the assets and liabilities transferred, reduced by the amount of cash received. This resulted in a negative carrying value, with the excess credit being recognised as an adjustment to the amount of goodwill on other components of the interdependent transactions - in this case a reduction in the goodwill of CSL (refer to note 37(l)).

As at 31 December 2002, we wrote down the entire carrying amount of our investment in Reach under both A-IFRS and USGAAP, which eliminated most of the USGAAP difference previously reported for Reach.

For both A-IFRS and USGAAP we ceased equity accounting our investment in Reach in fiscal 2003 due to the investment, including other non-participating interests in Reach, being written down to zero.

Summary of investment adjustments


Telstra Group



2006 2005 2006 2005$m $m $m $m

3GIS partnership. . . . . . . . - 27 27 27PCCW converting note . . . . - (10) - -Reach Ltd . . . . . . . . . . . . - - (90) (90)

- 17 (63) (63)


307



37(f) Retirement benefits

Under USGAAP, our defined benefit plans are accounted for under Statement of Financial Accounting Standards No. 87 (SFAS 87) “Employers’ Accounting for Pensions”. While the requirements of this standard are broadly consistent with our policy under A-IFRS (refer note 2.24), there are a number of key differences.

Under A-IFRS, actuarial gains and losses are recognised directly in retained earnings. Under USGAAP, the recognition of certain gains and losses is delayed. Aggregated unrecorded gains and losses exceeding 10% of the greater of the aggregated projected benefit obligation or the market value of the plan assets are amortised over the average expected service period of active employees expected to receive benefits under the plan.

Under USGAAP, future investment and contribution taxes of the fund are not taken into account, with only current taxes reflected in the measurement of the net periodic pension cost and prepaid pension asset.

Based on industry practice in Australia, under A-IFRS the defined benefit asset is adjusted for the estimated impact of future investment and contribution taxes of the fund, which are considered part of the ultimate cost to settle the obligation. Future investment tax is taken into account through an adjustment to the discount rate, while a separate tax reserve is created to take into account future contribution tax benefits.

Due to a change in accounting principle we now capitalise a portion of the net period pension cost under USGAAP (refer to note 37(b)), consistent with our policy under A-IFRS. However, under A-IFRS we have only applied this policy from 1 July 2004, our transition date to A-IFRS. Under USGAAP, we have adjusted our property, plant and equipment to reflect this policy as if it had always been applied. Furthermore, differences in the pension cost have lead to differences in amounts capitalised. These differences between A-IFRS and USGAAP have an ongoing impact on depreciation and amortisation.

Presented below are the disclosures required by USGAAP that are different from A-IFRS. These disclosures have been prepared with respect to only the defined benefit components of our pension plans.



2006 2006 2005$m US$m $m

Net periodic pension costThe components of net periodic pension cost for our definedbenefit plans are as follows:

Service cost on benefits earned. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 159 200Interest cost on projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 168 223Expected return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (333) (247) (317)Expenses and taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 12 16Member contributions for defined benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (20) (15) (21)Transfer of funds to defined contribution plan (i). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 69 78Curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 43 -Settlement gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (7) (5) (4)Net periodic pension cost per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 247 184 175Net periodic pension cost per A-IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182 136 201Net impact on net income due to different pension cost capitalised . . . . . . . . . . . . . . . . . . . . . . 21 15 (25)Total USGAAP adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 33 (1)

.We used the following major assumptions to determine net periodic pensioncost/(benefit) under USGAAP :Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.98% 5.98% 5.99%Expected rate of increase in future salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.02% 3.02% 3.97%Expected long-term rate of return on assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.00% 7.00% 7.50%


308



37(f) Retirement benefits (continued)



2006 2006 2005$m US$m $m

Projected benefit obligations

Reconciliation of change in projected benefit obligationProjected benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,964 2,942 3,540Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 159 200Interest cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 226 168 223Member contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5 4Benefit payments (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (715) (531) (69)Curtailment loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58 43 -Foreign currency exchange rate changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 (7)Actuarial (gain)/loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (379) (281) 73Projected benefit obligation at end of year per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,377 2,506 3,964

We used the following major assumptions to determine benefit obligations under USGAAP:Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.98% 5.98% 5.48%Expected rate of increase in future salaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.02% 3.02% 3.99%

Accumulated benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,374 1,762 2,472

Plan assets

Reconciliation of change in fair value of plan assetsFair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,519 3,354 4,302Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 825 612 360Transfer of funds to defined contribution plan (i). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (93) (69) (78)Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2 3Member contributions for defined benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 15 21Transfers/member contributions for accumulation benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 5 4Benefit payments (i) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (715) (531) (69)Plan expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (16) (12) (17)Foreign currency exchange rate changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1 (7)Fair value of plan assets at end of year per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,552 3,377 4,519


309



37(f) Retirement benefits (continued)

(i) Benefits payments include payments out of the defined benefit plan into the defined contribution plan.



2006 2006 2005$m US$m $m

Reconciliation of funded status of planProjected benefit obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,377) (2,506) (3,964)Plan assets at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,552 3,377 4,519Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,175 871 555Unrecognised net transition liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3 4Unrecognised net actuarial gain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,346) (998) (481)Pension (liability)/asset per USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (167) (124) 78Prepaid pension asset per A-IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,029 764 247Differences in pension cost capitalised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 33 24Total USGAAP adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,242) (921) (193)


310



37(g) Income tax

Under A-IFRS, we apply the balance sheet liability method of accounting for deferred taxes, which is broadly consistent with Statement of Financial Accounting Standards No. 109 (SFAS 109) “Accounting for Income Taxes”.

Our other USGAAP adjustments disclosed in note 37 have amended the carrying values of certain assets and liabilities under USGAAP and has resulted in an adjustment to the deferred tax balances.

Under A-IFRS, deferred taxes that arise on the initial recognition of an asset or liability are not recognised where the transaction is not a business combination and affects neither accounting profit nor taxable profit at the time of the transaction. USGAAP contains no such exemption and as such additional deferred tax balances have been recognised for USGAAP.

We have a number of intangible assets with an indefinite life, most notably our Trading Post mastheads. Under A-IFRS, the tax base used in the deferred tax calculation is the asset’s disposal value. It is assumed that the accounting carrying value will only be consumed upon disposal due to the fact that these intangible assets are not being amortised for accounting purposes.

However, under USGAAP the tax base used in the deferred tax calculation is the depreciable tax value, which is generally nil for these assets. This is because the intangible assets are not being specifically held for disposal and therefore the disposal value cannot be used for USGAAP purposes. This has resulted in an increase in deferred tax liability for USGAAP, with a corresponding increase in goodwill.

For A-IFRS, we classify all deferred tax balances as non current. For USGAAP, the classification between current and non current is based on the balance sheet classification of the underlying net current and non current asset or liability. Where there is no underlying asset or liability the classification is based on when the temporary difference is expected to reverse. The effect of this has been disclosed in the balance sheet measured and classified per USGAAP.

Summary of income tax adjustments


Telstra Group



2006 2005 2006 2005$m $m $m $m

Initial recognition exemption (7) 1 (43) (35)Indefinite life intangibles . . - - 8 8Property, plant and equipment (note 37(c)) . . . . 10 18 68 58Borrowing costs (note 37(d)) 7 4 (157) (164)Investments (note 37(e)) . . . (3) (5) (5) (2)Retirement benefits (note 37(f)) . . . . . . . . . . . . . . . 14 (2) 373 56Derivatives and hedging (note 37(i)) . . . . . . . . . . . (58) 29 59 111CSL New World Mobility (note 37( j)) . . . . . . . . . . . . . . . - (33) - -General reserve (note 37(k)) . - (3) - -Redundancy and restructuring (note 37(m)) . . (48) - (48) -Mobile handset subsidies (note 37(n)) . . . . . . . . . . . - (19) - (91)

(85) (10) 255 (59)


311



37(g) Income tax (continued)

As at 30 June 2006, our foreign operations have operating loss carryforwards of $291 million of which $9 million will expire in 2027. The remaining balance does not have an expiration date. We have established a valuation allowance of $185 million to provide for the operating loss carryforward due to our uncertainty over our ability to utilise these operating loss carryforwards.

As at 30 June 2005, our foreign operations have operating loss carryforwards of $230 million of which $13 million will expire in fiscal year 2027. We have established a valuation allowance of $161 million to provide for the operating loss carryforward due to our uncertainty over our ability to utilise these operating loss carryforwards



2006 2006 2005$m US$m $m

Deferred tax assetsForeign exchange translation, hedge and other finance costs. . . . . . . . . . . . . . . . . . . . . . . . . . 58 43 117Employee entitlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268 199 281Revenue received in advance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 110 130Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 122 64Trade and other payables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 42 38Accrued pension liability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68 50 -Tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291 216 230Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 58 23Total gross deferred tax assets under USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,132 840 883Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (185) (137) (161)Total net deferred tax assets under USGAAP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 947 703 722

Deferred tax liabilitiesProperty, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,047 1,520 2,003Prepaid pension asset. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 23Intangible assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 495 367 611Mobile handset subsidies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - - 91Total deferred tax liabilities under USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,542 1,887 2,728

Net deferred tax liability under USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,595) (1,184) (2,006)Net deferred tax liability under A-IFRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,703 1,264 1,802Difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 80 (204)

Reported as follows for the USGAAP balance sheet:Net current deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 376 279 294Net non current deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,971) (1,463) (2,300)

(1,595) (1,184) (2,006)


312



37(g) Income tax (continued)

The following table represents the domestic and foreign components of net income before income tax expense and minority interests and income tax expense/(benefit), calculated in accordance with USGAAP:

Actual income tax expense differs from the amounts computed by applying the statutory Australian income tax rate of 30% to net income before income tax expense and minority interests. The following table represents the reconciliation of the expected income tax expense to actual income tax expense:


Telstra GroupYear ended / As at 30 June

2006 2006 2005$m US$m $m

Net income before income tax expense and minority interests consists of:Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,829 3,586 5,940Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (646) (481) 20Net income before income tax expense and minority interest. . . . . . . . . . . . . . . . . . . . . . . . . . 4,183 3,105 5,960

Income tax expense/(benefit) consists of:Current:Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,785 1,325 1,718Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 11 22Total current income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800 1,336 1,740Deferred:Domestic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (326) (243) 22Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9) (7) (6)Total deferred income tax expense/(benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (335) (250) 16Income tax expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,465 1,086 1,756

Telstra GroupYear ended / As at 30 June

2006 2006 2005$m US$m $m

Expected income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,255 931 1,788

(Decrease)/increase in income taxes resulting from:Effect of different rates of tax on overseas income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19) (14) (11)Non assessable and non deductible items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88 64 (23)Cumulative effect of changes in accounting principles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105 78 -Under/(over) provision of tax in prior years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 27 2Actual income tax expense for USGAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,465 1,086 1,756


313



37(h) Employee share plans and compensation expenses

Our employee and executive share plans are described in note 31.

As at 1 July 2005 for USGAAP purposes, we have adopted Statement of Financial Accounting Standards No. 123 Revised (SFAS 123R), “Share-Based Payment” using the modified prospective application method. This standard requires entities to recognise an expense for the issue of employee stock options and similar awards based on their fair value on the grant date and recognised over the associated service period, which is usually the vesting period. However there is no financial statement effect for us upon adoption of SFAS 123R, as we previously adopted the fair value method of valuing employee stock options and similar awards under SFAS No. 123, “Accounting for Stock Based Compensation”.

Under A-IFRS, we have adopted AASB 2 “Share-based Payment” which is broadly consistent with SFAS 123R. As permitted under A-IFRS and described in note 31, we have elected to apply AASB 2 only to equity instruments granted after 7 November 2002, which have not vested as at 1 January 2005. Therefore a USGAAP adjustment is still required to record the compensation expense for equity instruments issued prior to 7 November 2002.

As a result of this adjustment, we have recorded nil compensation expense for the year ended 30 June 2006 in the reconciliation of net income to USGAAP (2005: $7 million).

37(i) Derivative financial instruments and hedging activities

Our risk management policies and objectives of entering into derivative financial instruments have been disclosed in note 35, “Financial and capital risk management.”

As permitted on the first-time adoption of A-IFRS, the Company elected to not restate comparative information for financial instruments within the scope of AASB 139: “Financial Instruments: Recognition and Measurement” (AASB 139). Therefore, for the year end 30 June 2005 the fair value of derivatives were not recorded under A-IFRS. Beginning 1 July 2005, derivative financial instruments are recognised and measured at fair value.

Under USGAAP, certain derivative instruments are designated as fair value hedges. The gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk, is recognised in other income/expense as part of net income during the period of the change in fair values.

Under A-IFRS, the same derivative instruments are designated as cash flow hedges. The effective portion of the gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified into net income in the same period or periods during which the hedged transaction affects net income. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognised in other income/expense as part of net income during the period of change.

We enter into forward foreign exchange contracts to hedge certain firm commitments denominated in foreign currencies relating to our capital expenditure programs. Under A-IFRS, realised gains and losses on termination of these hedges are recognised as a net cost of the equipment acquired.

We do not designate specific forward foreign exchange contracts as hedges under USGAAP. As a result, changes in fair value of the forward foreign exchange contracts are required to be recognised in net income for USGAAP purposes. We have recorded a marked to market adjustment in other income per USGAAP for the forward foreign exchange contracts outstanding at 30 June 2006.

As a result of the change in the capital expenditure foreign exchange contract rates, we also recorded an adjustment to increase fixed assets and depreciation expense. Additionally, another adjustment to other income per USGAAP was recorded to reverse net realised foreign exchange gains/losses capitalised in property, plant and equipment under A-IFRS.

We enter into interest rate swaps to manage our exposure to interest rate risk relating to our outstanding short-term commercial paper. We do not designate the interest rate swaps used to manage our interest rate exposure as hedges under USGAAP. As a result, changes in the fair values of these interest rate swaps are required to be included in the reconciliation of net income to USGAAP. We have recorded a marked to market adjustment in other income under USGAAP for changes in fair value of interest rate swap contracts outstanding at the fiscal year end.

We enter into cross currency interest rate swaps to hedge our exposure to the risk of overall changes in fair value relating to interest rate and foreign currency risk of our foreign currency borrowings. The ineffective portion of our hedging instruments (inclusive of the time value of money) is taken to other income/expense.

Under USGAAP we record our derivative instruments on a net basis by counterparty where a master netting agreement is in place. Under A-IFRS we are precluded from netting our derivative instruments by counterparty in the balance sheet.



314



37(i) Derivative financial instruments and hedging activities (continued)

Summary of derivative financial instruments and hedging activities

adjustments

37(j) CSL New World Mobility Limited (formerly Telstra CSL Limited (CSL))

Original acquisition

Under previous AGAAP, acquisition costs of $999 million were written off on acquisition of CSL in January 2001. USGAAP did not allow such a write-off, as it could not be supported by an analysis of the undiscounted cash flows of the entity. Accordingly, the goodwill write-off was reversed and is carried forward as a difference in the reconciliation of shareholders’ equity to USGAAP.

USGAAP adjustments were also recorded on the acquisition of CSL for the following:

• losses of $30 million on the hedge of the purchase of CSL were included in the cost of acquisition under previous AGAAP, but were recognised in net income under USGAAP; and

• recognition of a deferred tax asset of $33 million under USGAAP associated with fair value acquisition adjustments, with a corresponding decrease to goodwill. This deferred tax asset was realised in fiscal 2005.

Goodwill impairment

On 31 March 2006, we merged the CSL Group with the mobile operations of New World PCS Holdings Limited and its controlled entities (New World Mobility Group) to form the CSL New World Mobility Group. Our carrying value of goodwill under USGAAP forCSL has historically been higher than under A-IFRS due to theUSGAAP adjustments on original acquisition, and the merger transaction indicated that a pre-existing impairment under USGAAP existed in CSL.

We performed an impairment test on our goodwill balance in CSL prior to recording the merger and as a result we recognised an impairment loss in our net income per USGAAP. The fair value of CSL for the purposes of the impairment test was calculated using a discounted cash flow technique.

Historically under USGAAP, we have recorded impairment losses of $394 million. These impairment losses were based on a discounted cash flow technique used to calculate the fair value of CSL.

New World Mobility merger

Under the merger agreement, CSL issued new shares to New World Mobility Holdings Limited for 100% of the issued capital of the New World Mobility Group and $44 million cash. The issue of new shares diluted our ownership interest in the merged group to 76.4%.

Under A-IFRS, a dilution gain was recognised directly in equity, being the difference between the fair value of the interest acquired in the New World Mobility Group and the carrying value of the diluted interest in the merged group, including any foreign currency translation reserve balance.

Due to the USGAAP impairment recorded in CSL goodwill just prior to the merger transaction, the carrying value of CSL at the date of the merger was lower under USGAAP compared to A-IFRS. Furthermore, the foreign currency translation reserve balance associated with CSL under USGAAP at the date of the merger was significantly higher than the balance under A-IFRS due to the USGAAP adjustments described in note 37(l). This lead to us recording a dilution loss on the merger under USGAAP primarily due to the reclassification of $132 million from accumulated other comprehensive loss. This dilution has been recorded directly in equity for USGAAP purposes.


Telstra Group



2006 2005 2006 2005$m $m $m $m

Forward foreign exchange contracts . . . . . . . . . . . . 1 2 3 2Interest rate swaps . . . . . . 21 (85) - (163)Cross currency interest rate swaps . . . . . . . . . . . . . . (214) (13) (198) (209)

192 (96) (195) (370)


315



37(j) CSL New World Mobility Limited (continued)

Summary of CSL New World Mobility adjustments

37(k) Fair value and general reserve adjustments

Under A-IFRS, we recorded a reserve of $54 million on the acquisition of a controlling interest in TelstraClear Limited in December 2001, representing our share of the fair value adjustments attributed to our previous equity accounted ownership interest. Under USGAAP this reserve adjustment was offset against goodwill.

Under A-IFRS, the effect of dilutions of ownership due to equity transactions conducted by third parties are recorded in a reserve. Under USGAAP, this is treated as a sale of ownership interest and taken to net income. For the year ended 30 June 2006, the adjustment to net income was $nil (2005: $5 million gain).

37(l) Goodwill and other intangible asset adjustments

Under both A-IFRS and USGAAP, goodwill is not amortised but reviewed for impairment annually, or more frequently if certain indicators or triggers arise. However, we ceased amortising goodwill under USGAAP from 1 July 2002 but did not cease amortisation under A-IFRS until 1 July 2004. As such we continue to record a historical USGAAP adjustment.

Under both A-IFRS and USGAAP, goodwill in foreign controlled entities is denominated in the functional currency of the foreign operation, with translation adjustments recorded in equity. Where there is a difference between the A-IFRS and USGAAP balance of goodwill, an adjustment is also made to the translation effect. Furthermore, on transition to A-IFRS we reset our foreign currency translation reserve to zero, which has been reversed for USGAAP purposes.

Summary of goodwill and other intangible asset adjustments

Intangible assets subject to amortisation

Our intangible assets still subject to amortisation are brandnames, customer bases, patents, trademarks and licences. The carrying amount of these intangibles are disclosed in note 15. The following table represents the estimated aggregate amortisation expense for these intangible assets which are still amortised under USGAAP:


Telstra Group



2006 2005 2006 2005$m $m $m $m

Original acquisition . . . . . . - - 936 936Goodwill impairment . . . . . (634) - (1,028) (394)New World Mobility merger . - - 36 -

(634) - (56) 542

Telstra Group


EquityYear ended / As at 30 June2006 2005 2006 2005

$m $m $m $m

Amortisation difference . . . . . . . . . - - 229 229Translation differences of goodwill in foreign operations. . . . . . . . . . . . . - - (158) (188)

- - 71 41


2007 2008 2009 2010 2011$m $m $m $m $m

Estimated aggregate amortisation expense . 169 141 107 104 102


316



37(l) Goodwill and other intangible asset adjustments (continued)

The following table is a reconciliation of the carrying amount of our goodwill under USGAAP by reportable segment:

37(m) Redundancy and restructuring

The principal difference between A-IFRS and USGAAP with respect to accruing for restructuring costs is that A-IFRS places emphasis on the recognition of the costs of the exit plan as a whole whereas USGAAP requires that each type of cost be examined individually to determine when it may be accrued. The differences are primarily related to the timing of the recognition of restructuring costs.

As a result we have recorded an adjustment of $46 million to reduce the provision related to contractual obligations. Under USGAAP, a liability is incurred for contractual obligations when the Company ceases using the right conveyed by the contract. As of 30 June 2006, the Company has not ceased using the rights conveyed by these contracts.

An adjustment of $115 million is recorded to reduce the provision for other exit costs. Under USGAAP, a liability is incurred for other exit costs if the Company has already incurred the cost. As of 30 June 2006, the Company has not incurred these expenses.

There is no significant GAAP difference between A-IFRS and USGAAP in relation to the redundancy provision we have recognised at 30 June 2006.

37(n) Mobile handset subsidies

In fiscal 2005 under USGAAP, we deferred our mobile handset subsidies and recognised them over the expected customer life. Under A-IFRS we expense handset subsidies as incurred.

On 1 July 2005, we changed our accounting principle under USGAAPto expense handset subsidies as incurred, consistent with our policy under A-IFRS. As such there is no longer a USGAAP adjustment. Refer to note 37(b) for further details.

The impact of this adjustment on net income for the year ended30 June 2005 was an increase of $64 million. Shareholders’ equity under USGAAP at 30 June 2005 increased by $303 million.


Telstra GroupTelstra

Enterprise & Telstra Government International Sensis Other Total

$m $m $m $m $m

Carrying amount of goodwill (USGAAP) at 30 June 2004 . . . . . . 83 1,962 235 1 2,281Additional goodwill recognised . . . . . . . . . . . . . . . . . . . . . . . 360 2 153 4 519Foreign currency translation adjustment . . . . . . . . . . . . . . . . . (6) (176) - - (182)Carrying amount of goodwill (USGAAP) at 30 June 2005 . . . . . . . . 437 1,788 388 5 2,618Additional goodwill recognised . . . . . . . . . . . . . . . . . . . . . . . 4 287 33 - 324Disposals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4) (272) - - (276)Foreign currency translation adjustment . . . . . . . . . . . . . . . . . - 55 - - 55Impairment losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (634) - - (634)Carrying amount of goodwill (USGAAP) at 30 June 2006 . . . . . . 437 1,224 421 5 2,087


317



37(o) Consolidation of variable interest entities

A-IFRS requires consolidation of an entity where we are able to dominate decision making, directly or indirectly, relating to the financial and operating policies of that entity to enable it to operate with us in achieving our objectives. Ownership percentage as a single factor does not determine consolidation under A-IFRS.

USGAAP requires a beneficiary to consolidate a variable interest entity if it is the primary beneficiary of that entity. The primary beneficiary is defined as having a variable interest in a variable interest entity that will absorb a majority of the entity’s expected losses, receive a majority of the entity’s expected residual returns (if no party absorbs a majority of the entity’s expected losses), or both. A variable interest entity is any legal structure used to conduct activities or hold assets that either:

• has an insufficient amount of equity to carry out its principal activities without additional subordinated financial support;

• has a group of equity owners that are unable to make significant decisions about its activities; or

• has a group of equity owners that do not have the obligation to absorb losses or the right to receive returns generated by its operations.

We have identified the following variable interest entities for which we are considered to be the primary beneficiary:

• Telstra Employee Share Ownership Plan Trust (TESOP97);• Telstra Employee Share Ownership Plan Trust II (TESOP99); and• Telstra Growthshare Trust.

These entities have been consolidated under both A-IFRS and USGAAP.

We have also identified the 3GIS Partnership to be a variable interest entity, of which we have a significant variable interest, but we are not the primary beneficiary. As such, we have not consolidated the 3GIS Partnership. For further information, refer to notes 30 and 37(c).

37(p) Arrangements that contain leases

Based on the requirements of Emerging Issues Task Force Issue No. 01-8 (EITF 01-8), “Determining Whether an Arrangement Contains a Lease”, an arrangement contains a lease if fulfilment of that arrangement is dependent upon the use of specific property, plant and equipment and it conveys the right to control the use of the specific property, plant and equipment to the purchaser.

If an arrangement is considered to contain a lease under EITF 01-8 then it is split into its lease and non-lease components using the relative fair value method, with each component accounted for separately. EITF 01-8 is only applicable to arrangements that we entered into or modified after 1 July 2003.

Currently under A-IFRS, and for arrangements entered into prior to1 July 2003 for USGAAP, we account for these types of arrangements as service agreements. There is no material impact on the reconciliations of net income and shareholders’ equity to USGAAP of this difference in accounting for embedded leases.

37(q) Recently issued United States accounting standards

In June 2006, the FASB issued Interpretation No. 48, “Accountingfor Uncertainty in Income Taxes — An Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting for uncertainty in income taxes recognised in an enterprise’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition requirements. The Company is currently evaluating the impact of this new Interpretation.

In April 2006, the FASB issued FASB Staff Position FIN 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R)” (“FSP 46(R)-6”), which provides additional guidance to consider when determining:

• whether an entity is a variable interest entity;• which interests are considered to be variable interests in the entity;

and• which party, if any, is the primary beneficiary of a variable interest

entity.

The Company is currently evaluating the impact of this new interpretation.



318



37(q) Recently issued United States accounting standards (continued)

In March 2006, the FASB issued Statement No. 156, “Accounting for Servicing of Financial Assets” (“SFAS 156”), which amends SFAS 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS 156 requires recognition of a servicing asset or liability at fair value each time an obligation is undertaken to service a financial asset by entering into a servicing contract. SFAS 156 also provides guidance on subsequent measurement methods for each class of servicing assets and liabilities and specifies financial statement presentation and disclosure requirements. SFAS 156 is effective for fiscal years beginning after September 15, 2006 and is required to be adopted by us in the first quarter of fiscal year 2008. The Company is currently evaluating the impact this new Standard but believes that it will not have a material impact on the Company's balance sheet, income statement or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments” (“SFAS No. 155”), which amends SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities” and SFAS No. 140, SFAS No.155 amends SFAS No. 133 to narrow the scope exception for interest-only and principal-only strips on debt instruments to include only such strips representing rights to receive a specified portion of the contractual interest or principle cash flows. SFAS No. 155 also amends SFAS No.140 to allow qualifying special-purpose entities to hold a passive derivative financial instrument pertaining to beneficial interests that itself is a derivative instrument. SFAS No. 155 is effective for fiscal years beginning after 15 September 2006. The Company is currently evaluating the impact this new Standard but believes that it will not have a material impact on the Company's balance sheet, income statement or cash flows.

In November 2005, the FASB issued FASB Staff Position SFAS 123(R)-3, “Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards” (“FSP 123(R)-3”). FSP 123(R)-3 provides an elective alternative method that establishes a computational component to arrive at the beginning balance of the accumulated paid-in capital pool related to employee compensation and a simplified method to determine the subsequent impact on the accumulated paid-in capital pool of employee awards that are fully vested and outstanding upon the adoption of SFAS 123(R). The Company does not believe that this FSP will have a material impact on the income statement or balance sheet.

In November 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) Nos. SFAS 115-1 and SFAS 124-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of other-than-temporary impairments. The adoption of the FSP did not have a material impact on the income statement and balance sheet.

In October 2005, the FASB issued FASB Staff Position SFAS 123(R)-2, “Practical Accommodation to the Application of Grant Date as Defined in SFAS 123(R)” (“FSP 123(R)-2”). FSP 123(R)-2 provides guidance on the application of grant date as defined in SFAS 123(R). In accordance with this standard a grant date of an award exists if:

• the award is a unilateral grant; and• the key terms and conditions of the award are expected to be

communicated to an individual recipient within a relatively short time period from the date of approval.

The Company does not believe that this FSP will have a material impact on the income statement or balance sheet.

In May 2005, the FASB issued FASB Statement No. 154, “Accounting Changes and Error Corrections — a replacement of APB Opinion No. 20 and FASB Statement No. 3” (“SFAS 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes”, and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements” and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after 15 December 2005 and requires prospective application. The Company is currently evaluating the impact of this new Standard.



319

This directors’ declaration is required by the Corporations Act 2001 of Australia.

The directors of Telstra Corporation Limited have made a resolution that declared:

For and on behalf of the board

Directors’ Declaration

(a) the financial statements and notes, set out on pages 117 to 318 of Telstra Corporation Limited and the Telstra Group:

(i) comply with the Accounting Standards and Corporations Regulations;

(ii) give a true and fair view of the financial position as at 30 June 2006 and performance, as represented by the results of the operations and cash flows, for the year ended 30 June 2006; and

(iii) in the directors’ opinion, have been made out in accordance with the Corporations Act 2001.

(b) they have received declarations as required by S.295A of the Corporations Act 2001;

(c) at the date of this declaration, in the directors’ opinion, there are reasonable grounds to believe that Telstra Corporation Limited will be able to pay its debts as and when they become due and payable in Australia; and

(d) at the date of this declaration there are reasonable grounds to believe that the members of the extended closed group identified in note 29(a) to the full financial statements, as parties to a Deed of Cross Guarantee, will be able to meet any obligations or liabilities to which they are, or may become subject to, under the Deed of Cross Guarantee described in note 29(a).

In accordance with subsection 334(5) of the Corporations Act 2001, the directors have elected to adopt the following Australian accounting standards early for the year ended 30 June 2006:

• AASB 119: “Employee Benefits” (issued in December 2004);• AASB 7: “Financial Instruments: Disclosures”;• AASB 2005-3: “Amendments to Australian Accounting

Standards”; and• AASB 2005-10: “Amendments to Australian Accounting

Standards”.

Donald G McGauchieChairman

Date: 10 August 2006Melbourne, Australia

Solomon D TrujilloChief Executive Officer and Executive Director


320

This report is included solely for the purpose of incorporation in Telstra Corporation Limited’s Annual Report 2006 as filed with the Australian Stock Exchange and the Australian Securities and Investments Commission.

Scope

The financial report and directors’ responsibility

The financial report comprises the income statement, balance sheet, statement of cash flows, and statement of recognised income and expense, accompanying notes to the financial statements, and the directors’ declaration for Telstra Corporation Limited (the Telstra Entity) and the consolidated entity, for the year ended 30 June 2006. The consolidated entity comprises both the Telstra Entity and the entities it controlled during that year (the Telstra Group).

The directors of the Telstra Entity are responsible for preparing a financial report that gives a true and fair view of the financial position and performance of the Telstra Entity and the Telstra Group, and that complies with Accounting Standards in Australia, in accordance with the Corporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed to prevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report.

Audit approach

I have conducted an independent audit of the financial report in order to express an opinion on it to the members of the Telstra Entity. My audit was conducted in accordance with Australian National Audit Office Auditing Standards, which incorporate the Australian Auditing and Assurance Standards, in order to provide reasonable assurance as to whether the financial report is free of material misstatement. The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internal control, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatements have been detected.

I performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001, including compliance with Accounting Standards in Australia, and other mandatory financial reporting requirements in Australia, a view that is consistent with my understanding of the Telstra Entity’s and the Telstra Group’s financial position, and of their performance as represented by the results of their operations and cash flows.

I formed my audit opinion on the basis of these procedures, which included:

• examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report; and

• assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimates made by the directors.

I have also audited the explanation and quantification of the major differences between Australian Accounting Standards compared to generally accepted accounting principles in United States of America, which is presented in note 37 to the financial statements. I have audited note 37 in order to form an opinion whether in all material respects, it presents fairly, in accordance with Accounting Standards in Australia and other mandatory financial reporting requirements in Australia and generally accepted accounting principles in the United States of America, the major differences between Australian Accounting Standards and generally accepted accounting principles in the United States of America.

While I considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of the procedures, my audit was not designed to provide assurance on internal controls.

I performed procedures to assess whether the substance of business transactions was accurately reflected in the financial report. These and the other procedures did not include consideration or judgment of the appropriateness or reasonableness of the business plans or strategies adopted by the directors and management of the Telstra Entity.

Independence

I am independent of the Telstra Group, and have met the independence requirements of Australian professional ethical pronouncements and the Corporations Act 2001. I have given tothe directors of the Telstra Entity a written Auditor’s Independence Declaration a copy of which is included in the Directors’ Report.In addition to the audit of the financial report, additional services were undertaken as disclosed in the notes to the financial statements. The provision of these services has not impaired my independence.

Independent Audit Report to the Members of Telstra Corporation Limited


321

Audit opinion

In my opinion, the financial report of the Telstra Group is in accordance with:

Further, in my opinion, note 37 to the financial statements presents fairly the major differences between Australian Accounting Standards and generally accepted accounting principles in the United States of America.

Ian McPhee

Auditor-GeneralDate: 10 August 2006Canberra, Australia

Independent Audit Report to the Members of Telstra Corporation Limited (continued)

(a) the Corporations Act 2001 including:

(i) giving a true and fair view of the financial position of the Telstra Entity and the Telstra Group as at 30 June 2006 and of their performance for the year ended on that date; and

(ii) complying with Accounting Standards in Australia and the Corporations Regulations 2001; and

(b) other mandatory professional reporting requirements in Australia.


322

We have audited the accompanying consolidated balance sheets of Telstra Corporation Limited and its controlled entities (the Telstra Group) and the unconsolidated balance sheets of Telstra Corporation Limited (the Telstra Entity) as of 30 June 2006 and 2005, and the related consolidated and unconsolidated statements of income, recognised income and expense and cash flows for each of the two years in the period ended 30 June 2006. These financial statements are the responsibility of the Telstra Group’s and the Telstra Entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Australian Auditing Standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Telstra Group’s or the Telstra Entity’s internal controls over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Telstra Group’s or the Telstra Entity’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Telstra Corporation Limited and its controlled entities and the unconsolidated financial position of Telstra Corporation Limited at30 June 2006 and 2005 and the related consolidated and unconsolidated results of their operations and their cashflows for each of the two years in the period ended 30 June 2006, in conformity with Australian Accounting Standards.

Australian Accounting Standards vary in certain significant respects from accounting principles generally accepted in the United States of America. Information relating to the nature and effect of such differences is presented in note 37 to the financial statements.

Ernst & Young

Melbourne, AustraliaDate: 10 August 2006

Report of Independent Registered Public Accounting Firm to the Shareholders and Board of Directors of Telstra Corporation Limited

323


Freedom of Information


Freedom of Information Act 1982 (Cth)

This statement is made in accordance with section 8 of the Freedom of Information Act 1982 (Cth) (FOI Act). The FOI Act gives a right of access, subject to exemptions and exceptions, to documents of the Telstra Entity. We are exempt from the operation of the FOI Act in relation to documents in respect of our commercial activities.

Functions

The particulars and functions of the Telstra Entity are set out in detail in this annual report. From time to time, the Telstra Entity may make decisions regarding the supply of telecommunications services and matters incidental, ancillary or complementary to the supply of telecommunications services that may affect members of the public.

Organisation

An outline of our organisation is given under ‘Information on the Company - Organisational structure’.

Consultative arrangements

Consultative arrangements exist between us, a number of groups with specific interests, as well as a wide range of groups including:

• the Telstra Consumer Consultative Council (residential, Small Office and Home Office customers);

• our Disability Forum and Disability Equipment Program Customer Advisory Group (customers with a disability); and

• the Low Income Measures Assessment Committee (low income Australians).

Categories of documents

We produce and/or retain numerous documents, including documents that are available to the public free of charge. Documents available to the public free of charge include our Customer Service Charter, Our Customer Terms, product and service brochures and our annual report. These and certain other categories of documents are available from our website, www.telstra.com.

The categories of documents that we produce and/or retain relate to the provision of telephone lines and customer premises equipment to homes and businesses, the provision of local, long distance and international telephone calls, the provision of payphones and provision of mobile, data, Internet and online services. There are also documents relating to wholesale services provided to other carriers and carriage service providers.

324



Freedom of information requests

Initial enquiries concerning requests for access to documents or amendment of personal records under the FOI Act may be directed to:

Telstra’s Information Access UnitLocked Bag 5691Melbourne Vic 3001

or:

Information Access UnitTelstra Corporation LimitedLevel 38242 Exhibition StreetMelbourne Vic 3000

Telephone enquiries should be directed to the Information Access Manager on (03) 9632 3376.

325



326



327



328



329



330



331



332



333



334



335



336



Telstra Corporation LimitedABN 33 051 775 556

Telstra Corporation Limited is an Australian company listed on the Australian Stock Exchange (ASX) and the New Zealand Stock Exchange (NZX) as well as the New York Stock Exchange (NYSE). This Annual Report has been prepared solely to meet the requirements of the Corporations Act, the ASX Listing Rules and other Australian regulations.

In previous years Telstra has prepared its annual report to comply with both the Australian Corporations Act and the US Securities and Exchange Commission (SEC) Form 20-F requirements.

In December 2005 the SEC proposed rules that, if adopted, would make it easier for foreign companies to terminate their SEC registration. If the SEC’s proposed deregistration rules are adopted, Telstra intends to deregister from the SEC ongoing reporting obligations and to delist its ADRs from the NYSE at the earliest opportunity, which may be accomplished by the end of this calendar year. If Telstra is unable to deregister before the end of calendar 2006, then it will lodge a Form 20-F with the SEC in December 2006. If Telstra lodges a Form 20-F with the SEC, then it will also lodge the Form 20-F with the ASX.

Except where otherwise stated, the information contained in this Annual Report was previously released to the market on 10 August 2006 and was current as of that date.

Shareholders should also refer to Telstra’s Annual Review for additional information about the company. Copies of the Annual Report and the Annual Review are available on the Internet:

www.telstra.com.au/abouttelstra/investor/annual_reports.cfm

Copies of the Annual Report and the Annual Review may also be requested from the Share Registry by calling 1300 88 66 77.

FRONT COVERFeatures Nick Dionisopoulos from Telstra Operations. Nick is part of the fi rst wave of students to experience the benefi ts of the newly launched Telstra Learning Academy. The Learning Academy is equipping our technical and engineering people with the right skills to build, operate and maintain next-generation networks and better serve customers.

can do what Telstra does.Telstra is the only communications company in Australia that can provide customers with a truly integrated telecommunications experience across fi xed line, mobiles, broadband (BigPond®), information, transaction and search (Sensis®) and pay TV (FOXTEL).

Our vision is to do for customers what no one else has done: create a world of 1-click, 1-touch, 1-button, 1-screen, 1-step solutions that are simple, easy and valued by individuals, businesses, enterprises and government.

Note – Timing of events may be subject to change. Any changes will be notifi ed to the AustralianStock Exchange (ASX).

2007

Half year results announcement 15 FebEx-dividend share trading commences 26 FebRecord date for interim dividend 2 MarInterim dividend paid 30 MarAnnual results announcement 9 AugEx-dividend share trading commences 20 AugRecord date for fi nal dividend 24 AugFinal dividend paid 21 SepAnnual General Meeting 7 Nov

Financial calendarRegistered Offi ceLevel 41, 242 Exhibition StreetMelbourne Victoria 3000 Australia

Douglas GrationCompany Secretaryemail: [email protected]

General Enquiries – Registered Offi ceAustralia: 1300 368 387All Other: +61(8) 8308 1721

Shareholder EnquiriesAustralia: 1300 88 66 77All Other: +61(2) 8280 7756Fax: +61(2) 9287 0303email: [email protected] website: www.linkmarketservices.com.au

Telstra Corporation LimitedIncorporated in the Australian Capital Territory

Telstra is listed on Stock Exchanges in Australia,New Zealand (Wellington), and the USA (New York)

Investor RelationsLevel 36, 242 Exhibition StreetMelbourne Victoria 3000 Australia

David AndersonGeneral ManagerPh: +61(3) 9634 8014email: [email protected]

The Telstra Share RegistrarLink Market Services Limited PO Box A942Sydney South NSW 1234 Australia

WebsitesTelstra’s investor relations home page:www.telstra.com.au/abouttelstra/investor

Telstra’s interactive advocacy website:www.nowwearetalking.com.au

Depositary for American Depository ReceiptsThe Bank of New YorkInvestor ServicesPO Box 11258Church Street StationNew York, NY 10286-1258

Toll Free telephone number for US callers:1-888-BNY-ADRs

Telephone number for international callers:+1 (212) 815 3700

email: [email protected]: www.stockbny.com

Contact details


no one else...

annual report 2006

Visit Telstra Investor Relations at www.telstra.com.au/abouttelstra/investor or visit our interactive advocacy website at www.nowwearetalking.com.au

Telstra annual report 2006


creo